{"id":98760,"date":"2025-03-04T12:41:26","date_gmt":"2025-03-04T20:41:26","guid":{"rendered":"https:\/\/www.redfin.com\/blog\/?p=98760"},"modified":"2025-03-04T12:41:26","modified_gmt":"2025-03-04T20:41:26","slug":"what-is-a-home-equity-loan","status":"publish","type":"post","link":"https:\/\/www.redfin.com\/blog\/what-is-a-home-equity-loan\/","title":{"rendered":"What is a Home Equity Loan? Here\u2019s How it Works"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">One of the biggest financial <\/span><a href=\"https:\/\/www.redfin.com\/guides\/benefits-of-homeownership\" data-wpel-link=\"exclude\"><span style=\"font-weight: 400;\">benefits of homeownership<\/span><\/a><span style=\"font-weight: 400;\"> is building equity\u2014an asset you can tap into when needed. A home equity loan allows you to borrow against that equity, providing funds for major expenses like home renovations, debt consolidation, or investments.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In this Redfin article, we\u2019ll cover what a home equity loan is, how it works, and what you can use the loan for. Whether you own a <\/span><a href=\"https:\/\/www.redfin.com\/city\/17150\/UT\/Salt-Lake-City\" data-wpel-link=\"exclude\"><span style=\"font-weight: 400;\">home in Salt Lake City, UT<\/span><\/a><span style=\"font-weight: 400;\">, or a <\/span><a href=\"https:\/\/www.redfin.com\/city\/3105\/NC\/Charlotte\" data-wpel-link=\"exclude\"><span style=\"font-weight: 400;\">townhouse in Charlotte, NC<\/span><\/a><span style=\"font-weight: 400;\">, find out if a home equity loan is right for you.\u00a0<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Key takeaways<\/span><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A home equity loan uses the equity in your home as collateral.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">It typically has a fixed interest rate and provides a lump sum of cash.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Home equity loans can be used for various reasons, like home improvement projects, paying off debts, or investing.<\/span><\/li>\n<\/ul>\n<h2><img fetchpriority=\"high\" decoding=\"async\" class=\"alignnone size-full wp-image-86349\" src=\"https:\/\/www.redfin.com\/blog\/wp-content\/uploads\/2023\/08\/Small-Towns-SC.jpg\" alt=\"home with large patio\" width=\"1200\" height=\"674\" srcset=\"https:\/\/www.redfin.com\/blog\/wp-content\/uploads\/2023\/08\/Small-Towns-SC.jpg 1200w, https:\/\/www.redfin.com\/blog\/wp-content\/uploads\/2023\/08\/Small-Towns-SC-300x169.jpg 300w, https:\/\/www.redfin.com\/blog\/wp-content\/uploads\/2023\/08\/Small-Towns-SC-1024x575.jpg 1024w, https:\/\/www.redfin.com\/blog\/wp-content\/uploads\/2023\/08\/Small-Towns-SC-768x431.jpg 768w, https:\/\/www.redfin.com\/blog\/wp-content\/uploads\/2023\/08\/Small-Towns-SC-267x150.jpg 267w, https:\/\/www.redfin.com\/blog\/wp-content\/uploads\/2023\/08\/Small-Towns-SC-1122x630.jpg 1122w, https:\/\/www.redfin.com\/blog\/wp-content\/uploads\/2023\/08\/Small-Towns-SC-534x300.jpg 534w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><\/h2>\n<h2><span style=\"font-weight: 400;\">What is a home equity loan?<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">A home equity loan, sometimes abbreviated as HEL or HELOAN, is a type of loan that uses the equity you have in your home as collateral. It provides a lump sum of money that you repay over time with fixed monthly payments. Because the loan is secured by your home, interest rates are usually lower than personal loans or credit cards.<\/span><\/p>\n<h3><span style=\"font-weight: 400;\">What is home equity?<\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Home equity is the portion of your home\u2019s value that you own outright. It\u2019s the amount you\u2019ve paid toward the home &#8211; including <\/span><a href=\"https:\/\/www.redfin.com\/mortgage-calculator\" data-wpel-link=\"exclude\"><span style=\"font-weight: 400;\">mortgage payments<\/span><\/a><span style=\"font-weight: 400;\"> and your initial down payment. For example, say your home is worth $400,000. Your down payment was $80,000 and you\u2019ve paid an additional $20,000 toward your mortgage. Your home equity would be $100,000<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">What can a home equity loan be used for?<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Home equity loans can be used for a variety of things &#8211; not just home renovations. Here are some ways you can use home equity loans:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Remodel or update your home<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Pay off debts like student loans and credit cards<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Pay college tuition<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Cover wedding costs<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Buy a new car<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Build an emergency fund<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Use funds to invest in stocks<\/span><\/li>\n<\/ul>\n<h2><span style=\"font-weight: 400;\">How does a home equity loan work?<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">With a home equity loan, you\u2019ll have a designated repayment period, anywhere from 5 to 20 years, that you\u2019ll pay back each month in addition to your mortgage payments. The loans have fixed interest rates and are usually lower than personal loans or credit card rates.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">You must have enough equity in your home to serve as collateral for a home equity loan. You can <\/span><a href=\"https:\/\/www.redfin.com\/blog\/how-to-calculate-home-equity\" data-wpel-link=\"exclude\"><span style=\"font-weight: 400;\">calculate the equity in your home<\/span><\/a><span style=\"font-weight: 400;\"> to get an idea of how much home equity you have. Your lender will calculate the loan-to-value ratio (LTV) to determine how much you can borrow.\u00a0<\/span><\/p>\n<h3><span style=\"font-weight: 400;\">How LTV is calculated<\/span><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>LTV = (Your mortgage balance \u00f7 Home\u2019s value) \u00d7 100<\/b><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Most lenders allow you to borrow up to 80-90% LTV.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Additionally, most lenders prefer that you have a <a href=\"https:\/\/www.experian.com\/blogs\/ask-experian\/credit-education\/score-basics\/what-is-a-good-credit-score\/\" target=\"_blank\" rel=\"noopener nofollow external noreferrer\" data-wpel-link=\"external\">credit score<\/a> above 640. This varies from lender to lender, and some may prefer credit scores in the 700s.<\/span><\/p>\n<h2><img decoding=\"async\" class=\"alignnone size-full wp-image-86255\" src=\"https:\/\/www.redfin.com\/blog\/wp-content\/uploads\/2023\/08\/Small-Towns-PA.jpg\" alt=\"aerial view of small town in pennsylvania\" width=\"1200\" height=\"900\" srcset=\"https:\/\/www.redfin.com\/blog\/wp-content\/uploads\/2023\/08\/Small-Towns-PA.jpg 1200w, https:\/\/www.redfin.com\/blog\/wp-content\/uploads\/2023\/08\/Small-Towns-PA-300x225.jpg 300w, https:\/\/www.redfin.com\/blog\/wp-content\/uploads\/2023\/08\/Small-Towns-PA-1024x768.jpg 1024w, https:\/\/www.redfin.com\/blog\/wp-content\/uploads\/2023\/08\/Small-Towns-PA-768x576.jpg 768w, https:\/\/www.redfin.com\/blog\/wp-content\/uploads\/2023\/08\/Small-Towns-PA-200x150.jpg 200w, https:\/\/www.redfin.com\/blog\/wp-content\/uploads\/2023\/08\/Small-Towns-PA-840x630.jpg 840w, https:\/\/www.redfin.com\/blog\/wp-content\/uploads\/2023\/08\/Small-Towns-PA-400x300.jpg 400w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><\/h2>\n<h2><span style=\"font-weight: 400;\">What is a home equity line of credit (HELOC)?<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Unlike a loan, a home equity line of credit (HELOC) allows homeowners to borrow money as needed from their home equity. Like a credit card, you can borrow as much or as little as you need, up to a certain amount. The line of credit is open for a set term, often five or 10 years, with a repayment period.<\/span><\/p>\n<h4><span style=\"font-weight: 400;\">Which option is better?<\/span><\/h4>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Choose a home equity loan if you need a lump sum with predictable payments.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Choose a HELOC if you need flexible access to funds over time.<\/span><\/li>\n<\/ul>\n<h2><span style=\"font-weight: 400;\">What is a home equity agreement (HEA)?<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">A <\/span><a href=\"https:\/\/www.redfin.com\/blog\/what-is-a-home-equity-agreement\/\" data-wpel-link=\"exclude\"><span style=\"font-weight: 400;\">home equity agreement (HEA)<\/span><\/a><span style=\"font-weight: 400;\"> is another way to access your home\u2019s equity &#8211; without paying back any debts or monthly payments. An HEA allows you to sell a portion of your home to an investor or company in exchange for cash. The investor is paid back at the time you sell your home or after an agreed-upon number of years. However, HEAs have upfront costs that can be expensive.\u00a0<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Pros and cons of home equity loans<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Like any loan, there are pros and cons to a home equity loan. Let\u2019s take a look at them:<\/span><\/p>\n<h3><span style=\"font-weight: 400;\">Pros of a home equity loan<\/span><\/h3>\n<p><b>Fixed interest rates: <\/b><span style=\"font-weight: 400;\">Like most mortgage loans, a home equity loan offers a fixed interest rate. That means your repayment schedule will be the same month-to-month.<\/span><\/p>\n<p><b>Flexibility in use: <\/b><span style=\"font-weight: 400;\">You can use the money how you please, whether it\u2019s to make home improvements or pay off debt<\/span><\/p>\n<p><b>Lump sum of money: <\/b><span style=\"font-weight: 400;\">You\u2019ll get a lump sum of money upfront, so you\u2019ll be able to use it immediately.\u00a0<\/span><\/p>\n<p><b>Lower interest rates:<\/b><span style=\"font-weight: 400;\"> Compared to other loans, like a credit card or personal loan, home equity loans typically have lower interest rates.<\/span><\/p>\n<h3><span style=\"font-weight: 400;\">Cons of a home equity loan<\/span><\/h3>\n<p><b>One-time access to funds:<\/b><span style=\"font-weight: 400;\"> Home equity loans offer one-time access to funds, but if you need more money then you\u2019re out of luck. If you\u2019re unsure how much money you\u2019ll need access to, then a home equity line of credit (HELOC) may be better.<\/span><\/p>\n<p><b>Closing costs: <\/b><span style=\"font-weight: 400;\">With a home equity loan, you\u2019ll need to pay closing costs which can add up.<\/span><\/p>\n<p><b>Need to have substantial equity: <\/b><span style=\"font-weight: 400;\">Most lenders require that you have at least 15 to 20% equity in your home in order to qualify for a home equity loan. If you don\u2019t meet those requirements, then you likely can\u2019t get the loan.<\/span><\/p>\n<p><b>Risk of foreclosure:<\/b><span style=\"font-weight: 400;\"> While unlikely, taking out a home equity loan means you\u2019re using the home as collateral. In the event that you can no longer pay your mortgage payments and home equity loan repayments, you risk foreclosure.\u00a0<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Is a home equity loan right for me?<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Before applying for a home equity loan, shop around at several lenders and compare loan terms, interest rates, and conditions. Find out how much equity each lender requires you to have in your home to determine how much you\u2019ll be able to borrow and if that amount is enough.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Make sure you understand the other costs involved in taking out a home equity loan. These include closing costs, application fees, home appraisal fees, attorney\u2019s fees for document preparation, title search, and other legal costs.<\/span><\/p>\n<p><img decoding=\"async\" class=\"alignnone size-full wp-image-84786\" src=\"https:\/\/www.redfin.com\/blog\/wp-content\/uploads\/2023\/06\/Boca-Raton-FL-6052-NW-32nd-Ave-3.jpg\" alt=\"Outdoor living is a luxury home feature in Orlando, FL\" width=\"1200\" height=\"800\" srcset=\"https:\/\/www.redfin.com\/blog\/wp-content\/uploads\/2023\/06\/Boca-Raton-FL-6052-NW-32nd-Ave-3.jpg 1200w, https:\/\/www.redfin.com\/blog\/wp-content\/uploads\/2023\/06\/Boca-Raton-FL-6052-NW-32nd-Ave-3-300x200.jpg 300w, https:\/\/www.redfin.com\/blog\/wp-content\/uploads\/2023\/06\/Boca-Raton-FL-6052-NW-32nd-Ave-3-1024x683.jpg 1024w, https:\/\/www.redfin.com\/blog\/wp-content\/uploads\/2023\/06\/Boca-Raton-FL-6052-NW-32nd-Ave-3-768x512.jpg 768w, https:\/\/www.redfin.com\/blog\/wp-content\/uploads\/2023\/06\/Boca-Raton-FL-6052-NW-32nd-Ave-3-225x150.jpg 225w, https:\/\/www.redfin.com\/blog\/wp-content\/uploads\/2023\/06\/Boca-Raton-FL-6052-NW-32nd-Ave-3-945x630.jpg 945w, https:\/\/www.redfin.com\/blog\/wp-content\/uploads\/2023\/06\/Boca-Raton-FL-6052-NW-32nd-Ave-3-450x300.jpg 450w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><\/p>\n<h2><span style=\"font-weight: 400;\">FAQs about home equity loans<\/span><\/h2>\n<h3><span style=\"font-weight: 400;\">How much can you borrow with a home equity loan?<\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Most lenders will let you borrow up to 80% of your home equity, although this can be upwards of 90%. The actual amount will vary depending on how much home equity you have and what your remaining mortgage balance is.\u00a0<\/span><\/p>\n<h3><span style=\"font-weight: 400;\">Are there closing costs on a home equity loan?<\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Taking out a home equity loan means you\u2019ll need to pay closing costs on the loan. They usually are between 2 &#8211; 5% of the loan amount. Sometimes, it can be less than the closing costs on a traditional mortgage or a cash-out refinance, but not always. The closing costs on a home equity loan include appraisal fees, title search fees, and loan origination fees.\u00a0<\/span><\/p>\n<h3><span style=\"font-weight: 400;\">Is interest on a home equity loan tax-deductible?<\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Yes, you can deduct home equity loan repayments from your taxes, up to $750,000, if filing jointly, and $375,000, if married filing separately. However, if you\u2019re receiving a home equity loan after 2017, you must use the loan to \u201cbuy, build, or substantially improve\u201d your home in order to claim the deduction. You\u2019ll need to itemize your taxes in order to receive this benefit.\u00a0<\/span><\/p>\n<h3><span style=\"font-weight: 400;\">Is a home equity loan the same as a second mortgage?<\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Yes, home equity loans are considered second mortgages. A second mortgage is a loan taken out against the home itself. It may also be called a junior lien.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>What is a home equity loan? Find out how to take out a home equity loan, the loan requirements, and if it\u2019s the right option for you.<\/p>\n","protected":false},"author":537,"featured_media":86349,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"default","adv-header-id-meta":"","stick-header-meta":"default","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"set","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[34277],"tags":[34882,34642],"coauthors":[33440],"class_list":["post-98760","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance","tag-home-ownership-costs-and-benefits","tag-mortgage"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v24.7 (Yoast SEO v27.7) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>What is a Home Equity Loan? 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