Home Equity Loans: How to Borrow Against Your Home’s Value
How Home Equity Is Calculated
If your home is worth $400,000 and you owe $250,000 on the mortgage, you have $150,000 in equity. Most lenders let you borrow up to 80–85% of your equity, which means you could access up to $120,000–$127,500 in this example.
Home Equity Loan Key Terms
| Feature | Details |
|---|---|
| Loan type | Second mortgage — secured by your home |
| Interest rate | Fixed, typically 7–10% |
| Loan amount | Up to 80–85% of home equity |
| Repayment term | 5–30 years |
| Disbursement | Lump sum at closing |
| Tax deductible | Yes — if used for home improvements (up to $750K combined mortgage debt) |
| Closing costs | 2–5% of loan amount |
Home Equity Loan vs. HELOC
| Factor | Home Equity Loan | HELOC |
|---|---|---|
| Rate | Fixed | Variable |
| Disbursement | Lump sum | Draw as needed (like a credit line) |
| Monthly payment | Fixed and predictable | Varies with balance and rate |
| Best for | One-time large expense (renovation, consolidation) | Ongoing or unpredictable expenses |
| Interest paid on | Full loan amount from day one | Only what you draw |
| Risk | Home as collateral | Home as collateral + rate can rise |
When a Home Equity Loan Makes Sense
Home improvements are the ideal use — you’re reinvesting in the asset securing the loan, the interest is tax-deductible, and you may increase the home’s value. Debt consolidation can also work if you’re replacing 20%+ credit card debt with a 7–10% home equity loan — the interest savings are substantial.
Major one-time expenses like medical bills or education costs can justify a home equity loan if the alternative is high-interest debt. But always compare to an unsecured personal loan first — the rates are higher but your home isn’t at risk.
Qualification Requirements
| Requirement | Typical Threshold |
|---|---|
| Credit score | 680+ (some lenders accept 620+) |
| Home equity | At least 15–20% after the loan |
| Debt-to-income ratio | 43% or lower (including new payment) |
| Loan-to-value ratio | 80–85% combined (mortgage + equity loan) |
| Income verification | Stable employment, pay stubs, tax returns |
Key Takeaways
- Home equity loans provide a lump sum at a fixed rate, secured by your home.
- You can typically borrow up to 80–85% of your available equity.
- Best uses: home improvements (tax-deductible) and high-interest debt consolidation.
- Compare to a HELOC if you need flexible access rather than a lump sum.
- Never borrow against your home for discretionary spending — the risk of foreclosure isn’t worth it.
Frequently Asked Questions
How much can I borrow with a home equity loan?
Most lenders cap the combined loan-to-value ratio (mortgage + equity loan) at 80–85%. Calculate: (Home Value × 0.80) − Mortgage Balance = Maximum Home Equity Loan. On a $400K home with $250K owed: ($400K × 0.80) − $250K = $70,000.
Is home equity loan interest tax-deductible?
Yes, but only if the loan is used for “substantial home improvements” — buying, building, or improving the property. Interest on home equity loans used for debt consolidation, education, or other purposes is not deductible. Consult a tax professional for your specific situation.
How long does it take to get a home equity loan?
Typically 2–6 weeks from application to funding. The process includes appraisal, credit check, income verification, and title search. Some lenders offer faster closings with digital appraisals.
Can I get a home equity loan with bad credit?
Some lenders work with scores as low as 620, but expect higher rates and lower borrowing limits. A credit score below 680 typically adds 1–3% to your rate. Consider improving your credit score before applying if possible.
What happens if my home value drops?
You still owe the full loan amount regardless of your home’s value. If values drop enough, you could be “underwater” — owing more than the home is worth on both mortgages combined. This is why conservative borrowing (keeping combined LTV at 80% or below) provides a safety margin.