Quick answer
A home equity loan is a second mortgage paid out as one lump sum, with a fixed rate and a fixed monthly payment over a set term, usually 5 to 30 years. Most lenders let your first mortgage plus the new loan reach 80% to 85% of your home's value. To qualify you'll typically need a credit score in the high 600s or better, a debt-to-income ratio under about 43% to 50%, and income you can document.
How a home equity loan works
Equity is what your home is worth minus what you still owe on it. A home equity loan lets you borrow part of that equity without touching your first mortgage. Your current rate and payment stay exactly where they are. The new loan sits behind it as a second lien.
You get the full amount at closing. From the first month you pay principal and interest, and because the rate is fixed, that payment never changes. When the term ends, the loan is paid off.
- The lender values the home, with a full appraisal or an automated valuation.
- It sets your limit: home value times the combined loan-to-value (CLTV) cap, minus what you owe.
- It checks credit, income and debt-to-income to decide how much of that limit you can carry.
- You close and wait three business days. On a primary residence, federal law gives you a right to cancel before the money goes out.
- The money is wired or paid out, and fixed payments start, usually the next month.
How much you can borrow
Start with your home's value, multiply by the lender's CLTV cap, then subtract your mortgage balance.
| Example only | 80% cap | 85% cap | 90% cap |
|---|---|---|---|
| Home value | $500,000 | $500,000 | $500,000 |
| Allowed total debt | $400,000 | $425,000 | $450,000 |
| Mortgage balance | $300,000 | $300,000 | $300,000 |
| Maximum home equity loan | $100,000 | $125,000 | $150,000 |
The 90% column is for strong credit with select programs. Most borrowers land at 80% to 85%. Run your own numbers with the home equity loan calculator.
Home equity loan requirements
| Requirement | What most lenders want | Notes |
|---|---|---|
| Equity | Keep 15% to 20% after the loan | Some programs allow 10% for strong credit |
| Credit score | 680+ for the best pricing | 620 to 660 is possible with more equity or a higher rate |
| Debt-to-income (DTI) | Under about 43% to 50% | Includes the new payment |
| Income | Documented and stable | W-2s and pay stubs, or tax returns, bank statements or a P&L if you're self-employed |
| Property | 1 to 4 units, in good condition | Primary homes get the best terms; second homes and rentals have lower caps |
| Payment history | No recent late mortgage payments | A 30-day late in the past year can stop an approval |
See credit score requirements and HELOC requirements for more detail. The rules for both products are close.
What the payment looks like
Example only: $60,000 at an example fixed rate of 8.25%.
| Term | Monthly payment |
|---|---|
| 10 years | $736 |
| 15 years | $582 |
| 20 years | $511 |
| 30 years | $451 |
A longer term lowers the payment but costs more interest overall. At 15 years, that $60,000 costs about $44,800 in interest. Rates here are examples, not a quote.
What it costs to get one
Closing costs usually run from a few hundred dollars to 2% to 5% of the loan. That covers the appraisal or valuation, title, recording and any origination fee. Some lenders cover most costs if you keep the loan open for a minimum time, often three years. Ask for the full fee sheet before you compare rates. A lower rate with $4,000 in fees can cost more than a slightly higher rate with none.
Home equity loan or HELOC?
Pick a home equity loan when you know the exact amount and want a payment that never changes. A roof, a debt payoff with a set plan, or a down payment on another property are typical. Pick a HELOC when the amount is uncertain or spread over time, because you only pay interest on what you use. Full comparison: HELOC vs home equity loan.
Things to watch
- Your home secures the loan. Miss enough payments and you can lose it. Borrow for things that hold value or save you money.
- Prepayment fees. Some loans charge a fee or claw back closing costs if you pay off early. Ask.
- Selling soon. The loan is paid off from your sale proceeds, so it shrinks what you walk away with.
- Tax deductions. Interest may be deductible only when the money buys, builds or substantially improves the home. See tax rules and talk to your CPA.
FAQ
What is a home equity loan in simple terms?
It's a second mortgage that pays you one lump sum based on your home's equity. You repay it at a fixed rate with the same monthly payment over a set term, usually 5 to 30 years, while your first mortgage stays untouched.
What credit score do you need for a home equity loan?
Most lenders want 680 or higher for their best pricing. Some approve scores in the low to mid 600s with more equity left in the home or at a higher rate.
How much can I borrow with a home equity loan?
Usually up to 80% to 85% of your home's value, minus what you owe on your mortgage. On a $500,000 home with $300,000 owed, that's about $100,000 to $125,000. Credit and income can lower that number.
How long does it take to get a home equity loan?
Two to six weeks is typical. Loans that use an automated valuation instead of a full appraisal can close faster. On a primary home, funds go out three business days after you sign.
Is a home equity loan the same as a second mortgage?
A home equity loan is one type of second mortgage. A HELOC is another. Both sit behind your first mortgage and are secured by your home.
Tax information is general and not tax advice. Talk to your CPA or tax professional about your situation.
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