If you own a home and have built up equity, you have probably heard that you can borrow against it. A home equity loan lets you do exactly that: you borrow a lump sum, secured by your home, and pay it back in fixed monthly payments over a set number of years.
That can be a useful tool. It can also be an expensive mistake if you borrow too much, borrow for the wrong reason, or do not understand what happens if you cannot repay.
All rates and costs below are ranges and estimates for planning in 2026, not verified live rates. Your actual offer will depend on your credit, income, home value, and lender.
Quick answer
A home equity loan is a second mortgage: a lump sum secured by your home, repaid in fixed monthly payments over 5 to 30 years. Lenders usually cap total borrowing at 80 to 85% of your home’s value. Rates run lower than credit cards but your home is the collateral, so missed payments can lead to foreclosure.
What is a home equity loan?
A home equity loan is a second mortgage.
Your first mortgage is the loan you used to buy your home. A home equity loan sits behind it. You keep your existing mortgage and its rate and payment. You add a second, separate loan that uses your home as collateral.
Here is how it usually works:
- Your lender estimates what your home is worth, often with an appraisal or a valuation.
- The lender subtracts what you still owe on your first mortgage.
- The difference is your equity. Lenders will usually let you borrow only part of it, not all of it.
- You receive the approved amount as one lump sum.
- You repay it in equal monthly payments, with interest, over a fixed term.
Because the loan is secured by your home, lenders can often offer lower rates than on unsecured loans such as personal loans or credit cards. That lower rate is the main appeal. The trade-off: if you stop paying, the lender can foreclose to recover what you owe.
Unlike a credit card, a home equity loan does not give you ongoing credit. You get the money once. If you need more later, you would need to apply again, and approval is not guaranteed.
How much equity do you have, and how much can you borrow?
Equity is simple in theory:
Home value minus mortgage balance equals equity.
If your home is worth $400,000 and you owe $250,000 on your mortgage, your equity is $150,000.
In practice, lenders rarely let you borrow your full equity. Many lenders cap your total borrowing, meaning your first mortgage plus your home equity loan combined, at around 80% to 85% of your home value. Some lenders go higher, and some go lower, depending on your credit and the property. Treat those figures as typical guidelines, not a promise.
Using the example above:
- 80% of $400,000 is $320,000.
- You already owe $250,000.
- That leaves up to about $70,000 you might be able to borrow.
If your home value falls, your equity shrinks. If you bought recently or with a small down payment, you may have little equity to borrow against.
Lenders also check your credit score and history, income and employment, debt-to-income ratio (total monthly debt payments divided by gross monthly income), and whether you live in the home as your primary residence. A strong score and lower ratio generally help you qualify for more money at a better rate.
How a home equity loan is repaid
Most home equity loans have a fixed interest rate and a fixed term, commonly 5, 10, 15, 20, or 30 years. Your monthly payment stays the same for the life of the loan, assuming you have a fixed rate and you pay on time.
That predictability is a big advantage for budgeting, compared with a variable-rate product where the payment can rise.
Here is a simplified example to show how the math works. These are illustrations, not quotes:
- Borrow $50,000 over 15 years at an estimated fixed rate of 8%. Your monthly payment for principal and interest would be roughly $478.
- Borrow the same $50,000 over 10 years at the same estimated rate. Your monthly payment would be roughly $607, but you would pay much less total interest.
- Borrow $50,000 over 20 years at the same estimated rate. Your monthly payment would fall to roughly $418, but your total interest cost would rise sharply.
The pattern is always the same: a shorter term means a higher monthly payment and less total interest. A longer term means a lower monthly payment and more total interest. Do not choose the longest term just because the payment looks comfortable. Run the total cost, not just the monthly number.
You will also have two housing payments each month while both loans are active: your first mortgage payment and your home equity loan payment. Make sure your budget can handle both, even if your income dips for a few months.
Worked example: from equity to total cost
Example, putting the pieces together: your home is worth $400,000 and you owe $250,000, so your equity is $150,000. At an 80% cap, your total borrowing cannot exceed $320,000, which leaves about $70,000 you might be able to borrow.
Say you borrow $50,000 of that at an estimated fixed rate of 8% over 15 years. Your monthly principal and interest payment is roughly $478. Over 180 payments that totals about $86,040, which means about $36,040 in interest on top of the $50,000 borrowed. The same $50,000 over 20 years drops the payment to roughly $418 a month but pushes total interest far higher. That is why the cheapest monthly payment is rarely the cheapest loan.
Typical rates and costs in 2026
Home equity loan rates move with the wider interest rate environment, your credit score, your loan-to-value ratio, and your term. As a planning range for 2026, many borrowers might see fixed rates roughly in the 7% to 11% range, with stronger credit profiles toward the lower end and weaker profiles toward the higher end. These are estimates only. Check live offers from several lenders before you decide, because rates change and your personal rate could fall outside this range.
A lower rate than a credit card does not automatically make a home equity loan cheap. You also need to look at fees and closing costs. Common costs can include an application or origination fee, an appraisal fee, a credit report fee, title search and title insurance costs, recording fees, and closing costs. For some home equity loans, closing costs are estimated at roughly 2% to 5% of the loan amount, though some lenders charge less, waive some fees, or roll them into the loan.
If a lender waives closing costs, read the fine print. Some waivers require you to keep the loan open for a minimum period, often two to three years. If you close it early, you may have to repay those waived costs. Also ask whether there is a prepayment penalty. Many home equity loans do not have one, but some do, and a penalty can make it expensive to pay the loan off early or refinance later.
A useful comparison tool is the annual percentage rate, or APR. The APR includes interest plus many lender fees, so it gives you a fuller picture than the interest rate alone. When you compare offers, compare APRs for the same loan amount and term, and ask for a written breakdown of every fee.
Remember total interest too. A 50,000 dollar loan repaid over 15 years can cost tens of thousands of dollars in interest on top of the amount borrowed, depending on your rate.
The risks: your home is the collateral
With an unsecured loan, missing payments damages your credit and can lead to collections or a lawsuit. With a home equity loan, those risks still apply, and you add a bigger one: you could lose your home. If you fall behind, your lender can start foreclosure proceedings. Because a home equity loan is a second mortgage, the first mortgage lender also has a claim. In a foreclosure sale, the first mortgage is generally paid first, and the home equity lender is paid from what remains. That does not make the second lender harmless. It can still pursue what you owe in many cases, depending on your state law and your loan agreement.
Other risks are less dramatic but still costly. A fixed payment is predictable, but also inflexible: if you lose hours at work or face a medical bill, that payment is still due in full each month. If property values drop, you could owe more than your home is worth across both mortgages, making it harder to sell or refinance without bringing cash to closing.
Borrowing can also become a habit. A large lump sum at a relatively low rate can feel like found money. It is not. It is debt secured by the place you live. Using it for a car, a vacation, or everyday spending means paying interest for years on something that may be gone long before the loan is repaid. Rolling short-term debts into a 20-year or 30-year loan lowers the monthly payment, but can dramatically increase total interest.
None of this means you should never take a home equity loan. It means you should borrow only an amount you can repay comfortably, for a purpose worth the risk, with an emergency buffer left untouched. Keep at least three to six months of essential expenses in savings, separate from the loan money.
Home equity loan vs HELOC: what is the difference?
A HELOC is the product most often confused with a home equity loan. Both use your home as collateral and both let you borrow against equity, but they work very differently.
A home equity loan gives you a lump sum with a fixed rate and a fixed repayment schedule. A HELOC gives you a credit line you can draw from, repay, and draw from again during a draw period, usually around 10 years, followed by a repayment period.
Think of it this way: a home equity loan is like receiving a single check, while a HELOC is like having a credit card secured by your home, with a much larger limit and a lower rate than a typical card. HELOCs usually have variable interest rates, which means your rate and payment can rise or fall with market rates. Some HELOCs offer a fixed-rate option for part of the balance, but the standard product is variable.
| Feature | Home equity loan | HELOC |
|---|---|---|
| How you receive money | One lump sum | Draw as needed up to a limit |
| Interest rate | Usually fixed | Usually variable |
| Monthly payment | Fixed and predictable | Can change as rates and balance change |
| Best for | One large, known cost | Ongoing or uncertain costs over time |
| Risk if rates rise | Limited, if fixed | Payment can rise sharply |
| Temptation to overspend | Lower, money arrives once | Higher, credit stays available |
A home equity loan usually makes more sense when you know the exact amount you need, such as a fixed-price home renovation, consolidating a known amount of high-interest debt, or paying a one-time expense. You borrow once, you know the payment, and you pay it down steadily.
A HELOC usually makes more sense when costs will arrive in stages, such as a multi-phase renovation. You pay interest only on what you actually draw. The trade-off is uncertainty: if rates rise, your payment can rise too, and when the repayment period begins, your payment can jump because you must now repay principal as well.
Home equity loan vs cash-out refinance: what is the difference?
A cash-out refinance replaces your existing mortgage with a new, larger mortgage. You borrow more than you currently owe, pay off the old mortgage, and receive the difference in cash.
Example: you owe $250,000 on your mortgage. You refinance into a new mortgage of $300,000. After paying off the old loan and closing costs, you might receive roughly $50,000 in cash, minus fees.
A home equity loan, by contrast, leaves your first mortgage untouched and adds a second loan on top of it. Which one makes more sense depends heavily on your current mortgage rate.
A cash-out refinance can make sense if your current mortgage rate is higher than today’s rates. In that case, refinancing could lower your main mortgage rate and give you cash at the same time, leaving you with one payment instead of two.
A home equity loan often makes more sense if your current mortgage rate is lower than today’s rates. Refinancing would mean giving up a good rate on your full mortgage balance just to access a smaller amount of equity. Keeping the low-rate first mortgage and adding a smaller second loan is usually cheaper overall in that situation, even if the second loan rate looks higher on its own.
Other differences matter too. A cash-out refinance usually involves a full mortgage closing, with costs similar to buying a home. A home equity loan closing is often simpler and cheaper, though costs still apply. A cash-out refinance also resets your mortgage term. If you have 18 years left and refinance into a new 30-year loan, you could pay far more interest over time, even if the monthly payment falls. Always compare total cost over the same time horizon, not just the monthly payment.
When each option makes sense
There is no single best option. The right choice depends on what you need the money for, how much you need, and what your current mortgage looks like.
Choose a home equity loan when:
- You need a specific amount for a one-time purpose
- You want a fixed payment you can budget around
- Your current mortgage rate is low and you do not want to give it up
- You have stable income and can handle a second monthly payment
- The purpose adds lasting value, such as a necessary roof replacement
Choose a HELOC when:
- Your costs will come in stages over months or years
- You are unsure of the total amount and do not want to borrow it all upfront
- You are comfortable with a variable rate and can handle a rising payment
- You have the discipline to borrow only what you need and repay it steadily
Choose a cash-out refinance when:
- Your current mortgage rate is higher than current rates, or you can meaningfully improve your mortgage terms
- You want one payment instead of two
- You are borrowing a larger amount and the math shows lower total cost than a second loan
- You understand you are restarting your mortgage clock
Think twice, or look for alternatives, when:
- You need money for everyday spending or to cover a monthly shortfall
- You are already struggling to make your current mortgage payment
- The loan would leave you with no emergency savings
- You are borrowing to invest, speculate, or fund a business with uncertain returns
- You would need to borrow nearly all of your available equity
If several of those warning signs apply, the cheapest loan is not the answer. A smaller loan, a delayed project, or a non-home-secured option may be safer, even at a higher rate.
Smart uses and risky uses
Not every use of home equity is equal. The risk depends on whether the spending leaves you better off after the loan is repaid.
Stronger uses tend to be essential home repairs that protect the property, such as a failing roof or a broken heating system; renovations planned with firm quotes that genuinely improve livability or long-term value; and consolidating high-interest debt only if you close or strictly limit the paid-off accounts and do not run the old balances back up.
Weaker uses include vacations, weddings, or luxury purchases that will be gone before the loan is repaid; buying a depreciating car; covering everyday bills or a gap between paychecks; and investing in stocks, crypto, or a business venture where returns are uncertain. For debt consolidation, be honest with yourself: if the cause is ongoing overspending, a home equity loan moves the debt to your house without solving the cause, and you risk ending up with both a home equity loan and new card balances.
Pros and cons of a home equity loan
Pros: a fixed payment you can plan around; rates usually lower than personal loans or credit cards; your existing first mortgage and its rate stay untouched; and a lump sum that fits one large, known cost.
Cons: your home is the collateral, so missed payments can lead to foreclosure; a second monthly payment on top of your mortgage; closing costs of roughly 2 to 5%; and the temptation to borrow more than you need or to stretch short-term debts over 20 or 30 years.
How to qualify and apply
The process is similar to applying for a mortgage, though often a little faster. Expect these steps:
- Check your equity and credit. Estimate your home value, subtract your mortgage balance, and review your credit report for errors before you apply.
- Compare at least three lenders. Include banks, credit unions, and online lenders. Credit unions in particular sometimes offer lower rates or fees, though this varies.
- Ask for written estimates. Get the interest rate, APR, term, monthly payment, total fees, and any prepayment penalty or early-closure fee in writing.
- Apply and provide documents. Lenders typically ask for pay stubs, tax returns, bank statements, mortgage statements, and identification.
- Wait for valuation and underwriting. The lender will value your home and verify your income, debts, and credit.
- Review the closing disclosure carefully. Check the loan amount, rate, payment, fees, and term against what you were quoted. Do not sign if numbers changed without a clear explanation.
- Receive funds and set up repayment. Funds are usually disbursed after closing, sometimes after a short waiting period required by law for loans secured by a primary residence.
You also have a legal right to cancel many home equity loans secured by your primary residence within three business days after closing, known as the right of rescission. Use that window to re-read the documents if anything feels rushed or unclear.
Watch out for red flags: pressure to borrow more than you asked for, fees you were not told about upfront, or an offer that sounds far better than every other lender without a clear reason. If an offer feels too good, ask why, and get a second opinion.
Alternatives worth considering before you borrow against your home
For smaller amounts or shorter needs, another product may be cheaper overall, even at a higher rate, because it does not put your home at risk or stretch repayment over many years. A personal loan is usually higher rate but unsecured, with a shorter term, and often better for amounts you can repay in two to five years. A 0% introductory credit card offer can work for a smaller expense you can fully repay before the introductory period ends, but it is dangerous if you cannot, because the rate after that period is usually very high. Delaying a non-urgent renovation by six to twelve months while you save can also reduce or eliminate borrowing. A higher-rate loan repaid in three years can cost less in total interest than a lower-rate loan repaid in 20 years.
Frequently asked questions
Can I get a home equity loan with bad credit?
Possibly, but expect a higher rate, a smaller loan, or both. Some lenders specialize in lower credit scores, but the cost rises quickly. If your credit is weak because of recent missed payments or high balances, improving your score first, even by a modest amount, can save you thousands over the life of the loan.
Is the interest on a home equity loan tax deductible?
It can be, but only in certain cases, and tax rules change. In general, under current United States rules, interest may be deductible only if the loan is used to buy, build, or substantially improve the home that secures the loan, and only within applicable limits. Interest used for other purposes, such as paying off credit cards or buying a car, is generally not deductible. This is not tax advice. Check current IRS guidance or speak to a tax professional about your situation before you assume a deduction.
What happens if I sell my home before the loan is paid off?
Both your first mortgage and your home equity loan are usually paid off from the sale proceeds at closing. If the sale price does not cover both loans plus selling costs, you would need to bring cash to closing or negotiate with your lenders. That is another reason not to borrow up to your maximum equity.
Further reading
For official guidance, see the Consumer Financial Protection Bureau’s home-buying resources and the IRS rules on the home mortgage interest deduction. On this site, see our complete guide to home loans, our refinance cost guide, our first-time buyer guide, and our FHA loans guide.
A home equity loan can be a sensible way to fund a large, one-time expense at a lower rate than unsecured borrowing, with a fixed payment you can plan around. It earns that advantage by using your home as collateral, and that is a trade-off you should never take lightly.
Before you apply, confirm you actually need the full amount, confirm you can afford both mortgage payments even if income dips, and compare at least three written offers on APR and total cost, not just the monthly payment. If a HELOC or a cash-out refinance fits your situation better, choose that instead. The best borrowing decision is rarely the one with the lowest monthly payment. It is the one with the lowest total cost that you can repay safely, without putting the roof over your head at unnecessary risk. If you are unsure, pause. Your home is worth that extra care.
Sources and methodology
The figures, rules, and rates in this guide come from the authoritative sources linked throughout the article, including consumerfinance.gov, irs.gov. Where a figure is an estimate or a worked example, the article says so.
