What Is a Home Equity Loan, and How Does It Work? The Complete 2025 Guide

Sometimes it seems like life itself becomes more expensive when you’re a homeowner. When you have big expenses coming up on the horizon, a home equity loan can be an extremely cost-effective way to borrow money compared to unsecured debts like personal loans and credit cards. 

But home equity loans have some drawbacks to consider; chief among them, losing your home if you default. But if you understand how home equity loans work, they can still be a smart way to pay for many of life’s biggest expenses. 

Table of Contents

1. What is a home equity loan?
   1. 🏠 Quick recap: What is home equity?
2. How does a home equity loan work?
   1. How home equity loans work vs. HELOCs
3. How do you get a home equity loan?
   1. Minimum credit score and other requirements
   2. Shopping for a loan
4. Pros and cons
5. Should you take out a home equity loan?
6. Where to get a home equity loan

What is a home equity loan?

A home equity loan is a loan that you take out against the equity you have in your home—i.e., the mortgage-free portion of your home’s value. 

As you can probably tell just from that definition, there are a lot of moving parts here. It’s more complicated than a simple personal loan you can get online in a jiffy. Here’s a closer look at how a home equity loan works.

🏠 Quick recap: What is home equity?

To understand how a home equity loan works, you first must know a bit about home equity. Home equity is the lien-free value of your home. (A lien is a claim that someone has to your home’s value, like if you still owe a mortgage or overdue tax debts.) It’s easy to calculate home equity:

Home equity = Home value – any debts tied to your home

You can also use our home equity calculator to crunch the numbers for your home.

The amount of home equity you have is constantly changing, depending on your home’s value and how much home debt you have.

For most homeowners, their home equity grows over time as their home value rises and they pay down their mortgage balance. But if your home value drops or you take out more home debt, your home equity could decrease, too.

One of my clients took out a home equity loan to cover updates on their historic home. The loan allowed them to leverage the equity in their home to make these necessary improvements that also helped improve the home’s overall value. My clients were able to keep their emergency savings intact and continue to invest for retirement while paying down the loan.

How does a home equity loan work?

A home equity loan essentially lets you pull the equity you’ve built in your home out for cash. You receive the loan amount in a single lump sum that you can use for whatever purpose you choose, such as home improvements or debt consolidation.

You then repay the loan via monthly payments with a fixed interest rate over a set number of years. Because the loan is secured by your home equity, the interest rates are typically lower than you’ll find with unsecured loans, like personal loans. However, if you default on the loan, you risk losing your home.

Lenders vary when it comes to how their home equity loans work, but most share similar characteristics:

Term lengths	5 – 30 years
Interest rates (APR)	7.90% – 8.38% (average Oct. 2024 – Oct. 2025)
Interest rate type	Fixed
Loan disbursement	A single lump sum
Combined loan-to-value (CLTV) ratio	Up to 80%, including your mortgage (some lenders, such as Spring EQ, allow up to 90%)

The last point—the CLTV ratio—is especially important because it often dictates your maximum loan amount. Put another way, most lenders will limit the size of your home equity loan so that its balance—plus your mortgage—doesn’t exceed 80% of your home’s value. 

How home equity loans work vs. HELOCs

Home equity loans and home equity lines of credit (HELOCs) are both considered second mortgages because they’re secondary debts tied to your home, after your primary mortgage. You don’t have to refinance to get a home equity loan or HELOC.

Unlike a home equity loan, a HELOC allows you to borrow and repay money repeatedly, although it has more moving parts. In 2025, two-thirds of second mortgages consisted of HELOCs, while only one-third of borrowers opted for a home equity loan instead. 

How do you get a home equity loan?

Home equity loans can take a bit of time and money to set up. They are second mortgages, after all, and require much of the same work to establish as your first mortgage. 

Minimum credit score for a home equity loan and other requirements

Most people focus on the minimum credit score for a home equity loan, but you’ll need to pass other hurdles, too. Here’s a look at the most common home equity loan requirements, although keep in mind they can vary by lender:

CLTV ratio	80% or less, including the balance of your mortgage
Credit score	680 or higher
Home equity	20% or higher
Debt-to-income (DTI) ratio	43% or less, measured by the percent of your monthly income going toward existing debt payments.

Shopping for a home equity loan

Here’s a good strategy for getting a home equity loan, if you’re ready to take the leap:

1. Get ready to apply: Check your credit reports and your credit score. Round up all the financial documents you’ll need to apply (past tax returns and bank, investment, and earnings statements), and check your budget to see what you can afford. 
2. Compare lenders: Check around with local and national home equity loan lenders to see what they’re offering in terms of rates, terms, and other factors. Comparison websites like LendingTree are particularly handy here.
3. Get prequalified: You can check your potential loan rates by getting prequalified with the best lenders. Some might require a preapproval, which entails a hard credit inquiry that can impact your credit score. (That’ll happen either way in the next step.)
4. Complete a full application: Choose the best offer and complete a full application. You’ll need to submit additional details, along with the documents you’ve already rounded up.
5. Loan underwriting: Stay in touch with your lender as they process your application, because they may require extra information or documents. Often, your lender will require a home appraisal, as well.  
6. Close on your loan: If your application is approved, your lender will prepare a final loan agreement and a closing cost statement. You’ll pay the closing costs (or roll them into your home equity loan) and sign the paperwork, which you can do online or in person. 
7. Loan disbursement: Unless you opt to waive it, you’ll automatically enter a three-day rescission period where you can opt to back out of the contract if you change your mind. After that time is up, your lender will pay out the loan proceeds. 

Pros and cons of home equity loans

Taking out a home equity loan requires a lot of careful thought. Here are some of the biggest things to consider:

Pros

• Low fixed rates

  Banks charged 39% less for home equity loan rates than for personal loans during the third quarter of 2025. 

• Possible tax breaks

  If you use the loan proceeds for substantial home improvements, you may be able to write off the interest on your taxes. 

• Steady monthly payments

  A key benefit of fixed rates is that your monthly payment won’t change over time, making it easy to plan in your budget (unlike a HELOC).

• Large potential loan amounts

  You can borrow a lot more money with a home equity loan than other loan types—up to 80% of your home’s value, if you’re mortgage-free.

• Easy-to-understand structure

  Compared to other home equity products like HELOCs and reverse mortgages, it’s very simple to understand how a home equity loan works.

Cons

• Closing costs

  Lenders typically charge 2% to 5% to take out a home equity loan. You can often roll these fees into your loan, but that costs a lot more money in the long run. 

• Less wealth building

  Taking out more debt against your home means it’ll take longer to pay off, and you’ll get less cash from selling it if you’re still paying off the loan. 

• Foreclosure potential

  If you default on your home equity loan, your lender can foreclose on your home—even if you’re keeping up with mortgage payments. 

• Longer time to funding

  Home equity loans aren’t great for emergencies. The full underwriting and closing process can take up to six weeks. 

• Equity requirements

  You’ll need at least 20% equity in your home before you’re eligible. It can take years to qualify if you made a small down payment on your home. 

• Potential for an underwater home

  If the market tanks and your home value declines, it’s possible to owe more on your home than it’s worth, especially with a higher-CLTV loan.

Should you take out a home equity loan?

A home equity loan can be a smart way to borrow money, but it’s not right for everyone. Here are some signs that it might make sense in your situation:

• You’re borrowing the funds for a good use, like investing in the home itself.
• You have enough equity in your home to qualify for the loan amount you need. 
• You’ve checked out whether other home equity loan alternatives might work better. 
• You have an emergency fund saved to help you cover housing costs in tough times.
• You have a good handle on your budget and how big a monthly payment you can comfortably afford.

When clients are considering a home equity loan, I always discuss the pros and cons with them. I encourage them to use this type of loan for home improvements only (not additional spending or debt consolidation on unsecured loans). I also recommend paying the closing costs separately instead of rolling it into the loan and making sure they have a plan to pay back the loan in a timely manner.

Where to get a home equity loan

If you’re ready to start exploring home equity loan lenders, review our top recommendations below. Visit our best home equity loans round-up to learn more and see which lenders could be available based on your state.