For homeowners who have built up equity — either through regular mortgage payments or rising home values — a home equity loan (HELOAN) can allow them to tap that equity to fund other large expenses. Given in a lump sum at a fixed interest rate, a HELOAN can help pay for home renovations, cover medical expenses, or consolidate high-interest debt.
But here’s the catch: The loan is secured by your home, meaning if you fall behind on payments, you’re at risk of foreclosure. While that reality is nerve-wracking for many homeowners, home equity loans can be a smart financial tool when used appropriately in the right situations.
Here’s what you need to know about HELOANs, including how to judge whether they’re the right choice for you over other alternatives.
What is a home equity loan (HELOAN)?
A HELOAN, also called a home equity loan or second mortgage, allows homeowners to borrow against the equity built in their home. Unlike a refinance, this type of loan gets you access to cash while keeping your first mortgage (and the rate on that mortgage). For borrowers who locked in a mortgage rate around 3% in 2020-2022 and want to keep that low rate, a HELOAN can be an appealing option.
Similar to a purchase mortgage, a lender disperses funds for a HELOAN in a lump sum payment. The money comes directly from your home equity, and since you must maintain some equity in your home, there’s a limit to how much you can borrow.
You’ll have to repay the balance over a set term, typically lasting 5-30 years.[1] Rates will also be higher on these loans compared to those for a primary mortgage because there’s more risk in having two mortgages to repay.
“[HELOAN rates] are typically 2-4% higher than a normal 30-year fixed mortgage, depending on the credit profile, loan amount, and loan to value of the home,” says Taylor Lacy, loan officer at Edge Home Finance in Minnetonka, MN.
What can a home equity loan be used for?
Homeowners choose home equity loans for various use cases. “They are used for home improvements, renovations, repairs, debt payoffs, holiday spending, and rainy-day funds,” says Lacy.
Here are some specific examples of what you might use a home equity loan for:
- You have high credit card debt or other high-interest debt that you want to pay off.
- You want to renovate your kitchen, add a bathroom, or complete other updates.
- You have expensive medical bills to cover.
- You want to go back to school and need money to help pay for tuition.
- You need to repaint your home’s exterior and get a new roof.
- You want to purchase another property to earn rental income and use the funds toward a down payment.
- You want to boost your emergency savings fund.
- You have unexpected repairs to make to your home, such as buying a new furnace.
- You want to start a new business.
How much can you borrow with a home equity loan?
The amount you can borrow with a home equity loan depends on something called your combined loan-to-value (CLTV) ratio. Lenders use this ratio to determine how much you’re eligible to borrow with a home equity loan.
CLTV factors the total debt from your first mortgage, plus the debt that would come from your new home equity loan, against your current home value.
Many lenders cap total loan debt at 80-85% of the home’s appraised value. Keep in mind that the appraised value may be lower than estimates given on sites like Zillow.[2]
Here’s a formula you can use to calculate your CLTV:
(Existing mortgage + home equity loan balance) / appraised home value = CLTV
Let’s walk through two examples of homeowners at different points in their loan term to see how borrowing capacity varies based on loan maturity and equity.
Example 1: Homeowner early in their 30-year, $300,000 mortgage with a 6% fixed rate who has mostly paid toward interest and wants a home equity loan for $50,000
| Years elapsed on term | 5 |
| Total paid toward interest | $87,082 |
| Total paid toward principal | $20,837 |
| Remaining mortgage balance | $279,163 |
| Home value | $350,000 |
Let’s use the formula above to see if this homeowner could borrow $50,000 without exceeding the 80% CLTV cap.
($279,163 + $50,000) / $350,000 = 94% CLTV ❌
In this example, the borrower does not have enough equity yet to qualify for a $50,000 HELOAN. To qualify, they’d need to borrow less or wait for their home equity to increase.
Example 2: Homeowner late in their 30-year, $300,000 mortgage with a 6% fixed rate who has a low remaining mortgage balance and wants a home equity loan of $100,000
| Years elapsed on term | 20 |
| Total paid toward interest | $293,687 |
| Total paid toward principal | $137,990 |
| Remaining mortgage balance | $162,010 |
| Home value | $350,000 |
Using the same CLTV formula, here’s the calculation to see if this homeowner meets the 80% cap:
($162,010 + $100,000) / $350,000 = 75% CLTV ✅
Based on these two examples, you can see how the longer you’ve been paying off your mortgage and building equity, the more money you can qualify to borrow with a HELOAN. In both situations, if the home value rises dramatically, the borrowing capacity also rises.
What are the fees associated with a home equity loan?
Just like with a first mortgage, home equity loans come with certain fees and closing costs:
- Origination fee: Lenders charge this fee to process the loan, and it can cost 0.5–1% of the mortgage amount.[3][4][5] For a $250,000 loan, that’s $1,250–2,500.
- Appraisal fee: This fee covers the cost to have a professional appraiser provide a home valuation. The average home appraisal costs homeowners $358, according to 2026 Angi data.[6]
- Credit report fee: Associated with pulling a borrower’s credit score and history to create a loan estimate, the credit report fee usually costs less than $30.[7]
- Title search and insurance: The title search fee can cost $7–$50 but can sometimes be more.[8] Title insurance costs 0.5-1% of the loan balance. While the title search involves ensuring the property’s legal ownership and that there are no active liens or claims on it, title insurance provides protection to the new homeowners if any issues arise after the home sale finalizes.
- Loan recording fee: This fee can run $15–50 and covers the cost to legally document the transfer of a home’s ownership.[8] Individual counties set this fee, however, so the cost varies by location.
- Notary fee: Getting a notary public signature on your loan contract also costs money. This fee varies by state and by the number of signatures needed but typically runs $2–25.[9]
Closing costs vary by lender but typically total about 2–5% of the loan amount.[10] By shopping around with more than one lender, you can compare fees and terms to find the best deal.
Pros and cons of a home equity loan
A home equity loan comes with its advantages, but there are also cons to consider before selecting this loan:
Pros
- Fixed rates bring a predictable monthly payment
- Lower interest rate than unsecured debt like personal loans or credit cards
- Allows borrowers to keep the rate on their first mortgage
- Potential tax deductibility if loan is used for renovations
- Flexible use of the funds
Cons
- Risk of foreclosure if you fall behind on payments since your home serves as collateral
- Must pay interest on the whole loan amount
- Must pay closing costs (about 2-5% of the loan)
- Decreases your equity stake in your home
- One-time fund disbursement (a HELOC comes with a draw period, allowing you borrow what you need over time)
Alternatives to a home equity loan
A home equity loan isn’t your only option when it comes to using your equity to pursue other financial or home improvement goals. You can also consider a home equity line of credit (HELOC) or a cash-out refinance.
HELOAN vs. HELOC
A HELOAN is also known as a second mortgage because it works similarly to a primary purchase mortgage. You get a one-time lump sum payment that you repay at a fixed rate over a set term.
“Think of these as good for a specific project with a specific budget that you want to get done,” says Alex Olivera, broker and owner of Patriot Mortgage Group in Franklin, TN.
A HELOC, on the other hand, ”works very similarly to a credit card in the sense that you have a max limit, but you do not need to borrow that full amount if you do not wish to,” says Lacy.
HELOCs come with an initial draw period, typically lasting up to 10 years,[11][12][13] during which you can borrow money as you need, up to a maximum amount. Once the draw period ends, you’ll either have to repay what you borrowed in a large balloon payment or over a set term with a variable interest rate.
Olivera explains that HELOCs are best used in open-ended cases, phased projects, or situations when you want extra cash available for emergencies. "I’ve worked with investors that have them to have access to quick capital to buy an investment if needed and with regular homeowners that just want it open in case they lose their job and want extra security to fall back on if they run low on savings," Olivera says.
| HELOAN | HELOC | |
|---|---|---|
| Type of funding | One-time lump sum | Money taken out as needed during a draw period |
| Rate | Fixed (stays the same) | Variable (subject to change based on market conditions) |
| Repayment | Predictable monthly payments over a set term | Payments may increase or decrease over a set term due to a variable rate; might require a balloon payment |
| Best for | A project with a set budget or any other use with a definitive cost | Phased projects, emergencies, projects with uncertain costs |
When you’re debating between a home equity loan and a HELOC, consider these questions to guide your choice:
- Are you confident that you know exactly how much money you’ll need to borrow?
- Will you spend the money all at once or spread out over time?
- Would you prefer to have predictable monthly payments with a fixed rate?
- Are you comfortable with the risk of a variable rate or willing to refinance once the draw period ends?
Note that some lenders offer hybrid HELOCs that allow borrowers more flexibility to lock in a fixed rate on some or all of their balances. This can be a middle-ground solution for borrowers wary about potential variable rate hikes.
HELOAN vs. cash-out refinance
A cash-out refinance involves replacing your current mortgage with a brand new one for the amount of your remaining mortgage balance plus the amount of equity you “cashed out.”
“...When you do a cash-out refinance, you must refinance the entire mortgage loan amount at a new rate (sometimes higher than the one the person already has),” says Lacy. “For that reason, most people do not want to refinance their entire loan amount at a higher rate when they could just get a HELOC for the amount they need.”
This is especially true for many borrowers who locked in a low rate from 2020-2022 and don’t want to lose that rate to tap their equity.
Here’s a quick comparison of a HELOAN vs. a cash-out refinance:
| HELOAN | Cash-out refinance | |
|---|---|---|
| Mortgages to repay | Two | One |
| Keep current interest rate | Yes | No |
| Interest rates | Typically higher; fixed | Typically lower; fixed or variable |
| Best for | Use cases with a specific amount needed but you want to keep your current interest rate on your first mortgage | Use cases with a specific amount needed but you only want to have one loan to repay and you’d get a lower rate than your current mortgage |
Another concept to consider in your decision-making process is the blended rate approach. Often times — especially for those with a low locked-in rate — the “blended” rate between a primary mortgage and a HELOAN is still meaningfully lower than the rate on a cash-out refinance.
Let’s say a homeowner with a $350,000 mortgage locked in at 3% needs $80,000. They can either get a cash-out refinance for the full $430,000 at today’s rate, or opt for a home equity loan of $80,000 at the higher rate.
For the cash-out refinance option, let’s say a lender offers you a 6.25% rate on your $430,000 loan. Over the 30-year loan term — which resets when you refinance — you’ll pay $523,130 in total interest.
For the home equity loan option, a lender gives you a 15-year loan of $80,000 at 7.75%. Over 15 years, you’ll pay $55,544 in interest. If you combine that amount with the $181,221 in total interest you’d pay over the full 30-year loan term of your first mortgage, you’ll pay $236,765 toward interest altogether. So despite having two loans to repay, you’re still paying less in total interest than the cash-out refi on the full amount.
Keep in mind, though, that a loan with a shorter term comes with a higher monthly payment, so make sure your budget could handle the higher bill. Also, if rates have dropped significantly since you got your first mortgage, then a cash-out refinance might make more sense than a home equity loan.
How do you qualify for a home equity loan?
Qualifying for a home equity loan involves meeting some key lender criteria:
- Credit score: Varies but many lenders require a minimum score of 660-720, with the best rates and terms going to borrowers with higher scores
- CLTV ratio: Often no more than 80-85% but some lenders may go as high as 90%
- Debt-to-income (DTI) ratio: At least 43%
- Financial documentation: Bank statements, tax returns, W-2s, and pay stubs to determine your eligibility[14]
The process to apply for a home equity loan is similar to that for a primary mortgage. You’ll provide documentation that showcases all your financials, and the lender will order a home appraisal to confirm your home’s value — and determine how much you can borrow.
Olivera explains that lenders will also run a title search to check for any active liens or judgements against you.
But there’s a critical element to these types of loans that differs from a primary mortgage. With a home equity loan, you have what’s called the right of rescission. This term essentially means that you have three business days to change your mind and cancel the loan without penalty. To qualify, you must be using your primary home, not a second home, as collateral.[15]
| Did you know? Home equity loans close in an average of 39 days, according to the Mortgage Bankers Association’s 2025 Home Equity Lending Study.[16] |
How to shop for a home equity loan
If you’ve decided to pursue getting a home equity loan, it’s time to shop around for the best deal. Here are some steps to take:
- Compare lenders: Shop around with at least three lenders, including different types of lenders. Credit unions, for example, might offer more competitive rates on home equity products compared to larger national banks.
- Shop APRs not just interest rates: The APR, or annual percentage rate, includes all the fees a lender charges, so it conveys a more accurate estimate of a loan’s total cost compared to the interest rate alone. When comparing loan estimates, don’t ignore the APR.
- Get multiple quotes: If you’re worried about the credit impact of getting more than one quote from different lenders, keep in mind that all credit inquiries done within a 45-day window count as one inquiry.[17]
- Consider working with a mortgage broker: If you want help finding lenders and comparing their products, you might recruit a mortgage broker to do so on your behalf.
Knowing how to spot competitive rate offers can also help you pick the best option.
“Oftentimes different lenders are not too far from each other in terms of rate, but a good general rule is if you have good credit and equity you want to expect a rate near the fed prime rate,” says Olivera.
Is a home equity loan a good idea?
A home equity loan might not be a good idea for all borrowers, but there are some situations where they make sense over an alternative.
A home equity loan might be a good fit for you if:
- ✅ Your home value has increased significantly since you bought it.
- ✅ You’ve owned your home a long time and have a lot of equity built up.
- ✅ You have a low rate on your first mortgage that you want to keep.
- ✅ You plan to use the funds to consolidate high-interest debt and are confident you won’t repeat the habits that accumulated the debt to begin with.
- ✅ You intent to buy, build, or significantly improve your home, making the mortgage interest tax deductible (if you itemize your deductions).[18]
- ✅ You need a large sum to complete a home renovation, consolidate debt, or put toward another goal and you have a good estimate of how much money you’ll need.
You might want to consider an alternative to a HELOAN if:
- ❌ You don’t know how much money you’ll need, or you’ll need to withdraw money in phases (in which case, a HELOC might be better suited).
- ❌ You need an amount below $50,000. In this case, a personal loan or balance transfer card could be options to explore next.
- ❌ You’re already struggling with debt (such as high credit card debt) and don’t have a clear repayment plan to get or stay out of debt.
- ❌ Your credit score or DTI ratio needs some work and you wouldn’t get the most favorable rates or terms.
- ❌ You plan to use the funds on buying luxury items or depreciating assets such as cars or boats, or to pay for one-time events like weddings or expensive vacations.
- ❌ You aren’t comfortable with the risk of foreclosure on your home should you fall behind on payments for two mortgages.
Overall, a home equity loan can be a smart way to leverage the equity you’ve built in your home to help fund renovations or fulfill other financial goals.
“The biggest downside is the risk of losing the home if you can’t make the payments, but if the equity is used appropriately…that’s rarely an issue,“ says Olivera.
Connect with a loan officer to make a plan
Whether you’re thinking of applying for a home equity loan today or in a few months, talking to a loan officer now can help. An experienced loan officer can look at your current financial profile and advise you on your loan options.
At Best Interest Financial, we provide personalized, white-glove service that big-box and automated lenders can’t. With over 80 years of combined experience and billions in closed loans, our loan officers have the expertise to help identify creative financing possibilities that others miss.
No matter what your timeline is, we can help you develop a strategy to reach your goals and get you on the path to home ownership. Get a free, 60-second quote from Best Interest today to learn more.
Disclaimer: The information provided in this article is for informational and educational purposes only. It is not intended as legal, financial, investment, or tax advice, and should not be relied upon as such. Mortgage rates, terms, products, and eligibility requirements are subject to change without notice and vary based on individual circumstances, credit profile, property type, loan amount, and other factors. All loans are subject to credit approval. This content does not constitute a commitment to lend or an offer of specific loan terms. For personalized mortgage advice and to discuss loan products that may be suitable for your situation, please contact one of our licensed loan officers.