Last updated: May 21, 2026

What Is a Home Equity Loan?

How Does a Home Equity Loan Work?

A home equity loan works by letting you convert a portion of your home’s equity — the difference between your home’s market value and what you owe on your mortgage — into cash. You receive the entire loan amount upfront as a lump sum, then repay it over a set term with fixed monthly payments.

For example, if your home is worth $400,000 and you owe $250,000 on your mortgage, you have $150,000 in equity. With an 80% loan-to-value (LTV) limit, you could borrow up to $70,000 ($400,000 × 0.80 = $320,000 − $250,000 = $70,000).

Home equity loans are sometimes called “second mortgages” because they sit behind your primary mortgage in priority. If you default and your home is sold, your primary mortgage gets paid first, then the home equity loan lender.

Home Equity Loan Rates in 2026

As of March 2026, home equity loan rates range from approximately 7.5% to 10.5%, depending on your credit score, loan-to-value ratio, and the lender. Borrowers with excellent credit (740+) and low LTV ratios typically receive rates at the lower end of this range.

Unlike HELOCs, home equity loan rates are fixed — your rate and monthly payment stay the same for the entire repayment period, regardless of what happens in the broader interest rate market. This predictability makes budgeting straightforward.

Requirements to Get a Home Equity Loan

Lenders evaluate several factors when you apply for a home equity loan. Meeting these minimum thresholds improves your chances of approval and better rates.

• Minimum equity: At least 15–20% equity in your home (most lenders cap combined LTV at 80–90%)
• Credit score: Most lenders require a minimum score of 620, though 700+ gets significantly better rates
• Debt-to-income ratio (DTI): Typically must be below 43%, meaning your total monthly debt payments don’t exceed 43% of gross monthly income
• Stable income: Documented proof of reliable income — W-2s, pay stubs, or two years of tax returns for self-employed borrowers
• Home appraisal: The lender will order an appraisal to confirm your home’s current market value

What Can You Use a Home Equity Loan For?

Lenders generally don’t restrict how you use home equity loan funds. The most common uses include home renovations and improvements, debt consolidation, major purchases, medical expenses, and education costs.

However, using the funds for home improvements provides an additional benefit: the interest may be tax-deductible under current IRS rules. Interest on home equity loans used for other purposes — such as paying off credit cards or funding a vacation — is generally not deductible after the Tax Cuts and Jobs Act of 2017.

Pros and Cons of Home Equity Loans

Home equity loans offer clear advantages but come with real risks. Understanding both sides helps you decide whether this borrowing option fits your financial situation.

Home Equity Loan vs. HELOC: Key Differences

The main difference between a home equity loan and a HELOC is how you receive and repay the money. A home equity loan gives you a lump sum with fixed payments, while a HELOC works more like a credit card — you draw money as needed during a set period and typically pay variable interest.

Choose a home equity loan if you need a specific amount for a defined expense (like a $30,000 kitchen remodel). Choose a HELOC if your costs are ongoing or unpredictable (like a multi-phase renovation where you’re unsure of total costs).

Last updated: March 2026. Rates and requirements are subject to change. Always verify current terms with lenders directly.

Reviewed by Priya Iyer, CFA®. Priya Iyer, CFA®, is a chartered financial analyst with 14 years of experience in self-directed retirement vehicles, alternative assets, and residential mortgage products. Last reviewed May 2026.