Home Equity Loans Made Simple: How to Borrow Smart and Avoid Pitfalls

Owning a home is more than just having a roof over your head—it’s an opportunity to tap into your property’s hidden potential. A home equity loan lets you turn part of your home’s value into accessible cash, whether you’re planning a long-awaited renovation, covering an unexpected expense, or streamlining debt.

But before you borrow, it’s crucial to understand how this type of loan works, what risks it carries, and why it might (or might not) be right for you. In this guide, we’ll walk you through the basics—from qualifying and calculating your equity to weighing alternatives—so you can borrow confidently and protect the home you love.

Table of Contents

1. What is a home equity loan?
2. How does a home equity loan work?
3. How to choose a lender
4. How long are home equity loan terms?
5. Is a home equity loan a good idea?
6. Alternatives

What is a home equity loan?

A home equity loan lets you borrow a lump sum using your home as collateral. You get a fixed interest rate and set monthly payments, making it easy to budget. But because your home secures the loan, missing payments could lead to foreclosure—so it’s crucial to borrow responsibly.

How is equity calculated?

Your equity is simply your home’s current value minus what you still owe on your mortgage. Most lenders allow you to borrow up to 80% or 90% of that equity, depending on your credit and financial history. If you’d like a precise figure, try our home equity calculator.

Home equity loans are popular for large, one-time expenses—such as renovations or debt consolidation—because the fixed rate and fixed monthly payment provide stability. By contrast, a home equity line of credit (HELOC) works like a revolving credit line, so the amount you borrow (and your payments) can vary.

How does a home equity loan work?

• One-time lump sum

When you close on a home equity loan, you receive a single payout. You then repay that balance over a set term—e.g., five to 30 years—with fixed monthly payments. For a better idea of how much you can borrow, check our home equity loan calculator.

• Borrowing limits

Lenders look at three main factors to determine how much you can borrow:

1. Your home’s appraised value
2. Your remaining mortgage balance
3. Your loan-to-value ratio (LTV)

They typically cap your total LTV at around 80% to 85%. This protects the lender and you, ensuring you don’t borrow more than you can handle.

• How to qualify

Here’s what many lenders consider when you apply for a home equity loan:

1. Credit score (620+): Shows lenders you’re likely to repay.
2. DTI (43% or less): Keeps monthly obligations manageable.
3. At least 15% equity: Ensures you have enough “ownership” in your home.

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HELOC Requirements

• Repayment and fixed rate

You’ll usually make your first payment within a month or two of getting the loan. With fixed interest rates, your monthly payment stays the same, for predictable, easy-to-budget repayment.

How to choose a home equity lender

To choose a lender, you can prequalify with lenders that allow it. We recommend starting with the lenders below.

Figure and LendingTree both allow you to see prequalified rates with a soft credit check, which doesn’t affect your credit score.

Note that Figure offers a home equity line of credit, not a home equity loan—but it comes with fixed rates, like a home equity loan, so it’s more like a home equity loan with a bonus: It’s a revolving line of credit, so as you pay it down, if you need to borrow more, you can do so without filling out another application.

If you’re approved with multiple highly rated lenders, compare the rates, fees, terms, and total costs of the loans you’re offered. Generally, we recommend choosing the least expensive option.

How to get a home equity loan

Here’s how you can apply for a home equity loan:

1. Compare lenders: Gather a short list—aim for at least four lenders—and see what each offers in terms of rates, fees, and loan terms.
2. Prequalify: This helps you preview estimated rates and terms without a hard credit pull.
3. Submit your application: When you’re ready, you’ll provide financial documents (such as pay stubs and tax returns) and authorize a hard credit check.
4. Appraisal: The lender verifies your home’s value to confirm you have enough equity. (Some lenders, including Figure, use automated valuation models rather than in-person appraisals.)
5. Sign and close: If all looks good, finalize the loan paperwork and wait for the funds to arrive.

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How Long Does It Take to Get a Home Equity Loan?

How do you repay a home equity loan?

To repay your home equity loan, you’ll make fixed monthly payments through the end of your loan term.

Your rate determines what you pay each month. It also determines your interest expense, or how much you pay your lender for letting you borrow money.

To better illustrate how your rate affects you, imagine you and a friend both get $75,000 home equity loans with 20-year terms. Thanks to credit improvements and careful rate shopping, you score a lower rate than your friend. Here’s what each of you will pay for the same $75,000:

Compared to your friend, you’re paying about $20,000 less over the life of your loan—and your monthly payments are nearly $100 less.

How long are home equity loan terms?

Home equity loans often range from five to 30 years, giving you flexibility in how fast you pay off your balance. Shorter terms reduce total interest but raise your monthly payment. Longer terms mean lower monthly payments but higher interest over time.

Term (years)	Monthly payment	Total interest
5	$966.64	$7,998.40
10	$555.10	$16,612.30
20	$358.22	$35,971.73
30	$299.78	$57,919.09

• Shorter term (5 – 10 years): Higher monthly payments, but you’ll save on interest.
• Longer term (20 – 30 years): Lower monthly payments, though you’ll pay more interest overall.

Here’s a quick look at several lenders’ term options:

Lender	Repayment terms (years)
Figure	5, 10, 15, or 30
Navy Federal Credit Union	5, 10, 15, or 20
Rocket Mortgage	10 or 20
Discover	10, 15, 20, or 30

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Tip

Pick a term that balances monthly affordability and long-term savings—a shorter term can mean big interest savings, but a longer term might be easier on your current budget.

How to use a home equity loan

You can spend your home equity loan funds on whatever you wish. Still, some purposes are wiser than others. In our opinion, these are the smartest ways to use a home equity loan:

• Debt consolidation
• Home improvements
• Medical expenses
• Tuition

In short, it’s best to put your loan toward expenses that benefit you in the long run. 

Along those lines, you could use your home equity loan for an investment property. Make sure you do your research, though. This strategy might not make sense if your new property needs extensive repairs or won’t generate a positive cash flow for a while.

To that end, we don’t recommend using your home equity loan to cover risky or unnecessary expenses, including:

• Playing the stock market or padding your 401(k)
• Starting a business
• Lavish weddings or vacations

A good rule of thumb is not to use your home equity loan in ways that could drive you deeper into debt. Instead, channel your home equity loan toward purchases that have a lasting positive impact on your financial health and personal well-being.

Another reason to take out a home equity loan is if you are pursuing a business venture or other investment that has a solid foundation, although you will want to understand and be able to absorb the risks that could be associated with that. For example, if the business or investment does not yield what was expected or fails, you must ensure you can still pay the monthly payments.

To remain low-risk, I recommend using the home equity loan to improve your home or consolidating high-interest debt into a lower rate or lower monthly payment.

Erin Kinkade, CFP®

Pros and cons

Pros

• Often have lower rates

  Home equity loans tend to have better rates than personal loans and credit cards. Those lower rates often translate to interest savings and more affordable payments.

• No usage restrictions

  As long as you’re not doing anything illegal, you can use your home equity loan however you please. Pay down debt, go back to school, upgrade your HVAC—or all of the above.

• Higher loan amounts

  Home equity loans usually give you tens of thousands of dollars upfront. That hefty sum lets you cover larger expenses or meet multiple financial goals with just one loan.

• Possible tax benefit

  Few financing products come with the potential for tax savings—but home equity loans do. Depending on when you open your loan, you could deduct the interest on your taxes.

• Consistent payments

  Variable rates and balances result in fluctuating monthly payments, but this isn’t a concern with home equity loans. You’ll have the same payment month after month with no changes or surprises.

Cons

• Harder to qualify

  A solid credit score alone isn’t enough to get a home equity loan. Additional eligibility requirements, like having at least 20% equity, can make these loans less accessible.

• Might come with fees and closing costs

  Home equity loans may come with comparatively low rates, but that doesn’t automatically mean they’re more economical. Origination fees and closing costs can sometimes drive up the price, making these loans more expensive than anticipated.

• Could lose your home

  The risk of foreclosure is arguably the biggest downside of home-secured financing. If your loan payments become too much for too long, your lender could seize your home.

Consider avoiding a home equity loan if you’re already struggling to make your mortgage payments; it raises the risk of foreclosure. You might also skip it if you’re worried about housing market fluctuations, have an unstable income or career, or if you’re almost finished paying off your mortgage and don’t want another long-term debt. In these cases, adding extra payments and interest to your budget could create more financial pressure and put your home at greater risk.

Erin Kinkade, CFP®

Is getting a home equity loan a good idea?

Home equity loans may be the right choice if you’re financially stable, have sufficient equity, and will use the funds responsibly. The table below will help you get a better sense of when home equity loans are a good idea.

If you…	Consider a home equity loan?
Live in an area with rising property values	Yes
Need ongoing access to cash	No
Can qualify for a low rate	Maybe
Can handle an additional debt payment	Yes
Need to borrow a small amount	No
Don’t need immediate funding	Maybe

You’ll notice there’s not always a cut-and-dry answer to the home equity loan question. In some cases, it’s clear whether a home equity loan is the best move. In others, it may be harder to decide.

There are many ways to take equity out of your home. Before committing to any one financing tool, it’s worth weighing your options.

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Tip

Home equity investments let you tap your equity with no monthly payments. How do they work? You’ll sell a portion of your equity in exchange for cash, then buy it back at a later date.

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Read More

The 17 Pros and Cons of Home Equity Loans 

Assess your finances—credit score, debt-to-income ratio, and income stability—before deciding on a home equity loan or HELOC. Be clear about why you need it, ensuring the benefits outweigh the costs and the risk of losing your home is low.

Confirm you can repay the loan without squeezing your budget too tightly, and consider alternatives if necessary. Finally, consult a financial expert and mortgage specialist for tailored guidance. This thorough review will help you decide whether a home equity loan is truly the right fit.

Erin Kinkade, CFP®

Home equity loan alternatives

If you decide a home equity loan isn’t the best fit—or want to compare all your choices—here are three common alternatives:

1. HELOC

• How it works: A revolving credit line secured by your home; you borrow as needed during a draw period, then repay principal plus interest.

• Pros: Flexible borrowing, interest-only payments in the draw period, and you only pay interest on what you actually withdraw.

• Cons: Variable rates can make budgeting harder; using your home as collateral still carries foreclosure risk.

• Best For: Ongoing or sporadic expenses, such as multiple home renovation projects.

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Best HELOC Lenders

Cash-out refinance

• How it works: You replace your mortgage with a new one for a larger amount, pocketing the difference in cash.

• Pros: May score a lower rate if market conditions are favorable; combines your mortgage and equity financing into a single loan.

• Cons: Extends or restarts your mortgage term, potentially leading to more interest over time; also secured by your home.

• Best For: Borrowers who want to refinance at a lower rate and need a larger lump sum of cash.

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Best Cash-Out Refinance Companies

Personal loan

• How it works: An unsecured loan with fixed payments over one to seven years.

• Pros: No collateral required; approval can be faster and simpler than home equity financing.

• Cons: Often higher interest rates and smaller loan amounts; not ideal for large-scale projects.

• Best For: Short-term or smaller expenses where you don’t want to use your home as collateral.

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Best Personal Loans

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Tip

Each alternative has trade-offs—especially in interest rates, borrowing limits, and repayment terms. If you’re leaning toward a home equity loan but want to confirm it’s truly your best option, read our guide on the different types of home equity loans to help determine which may be right for you.