When you own your home, you can tap the equity you’ve built by taking out a home equity loan. Knowing how to get the best home equity loan rates means you can put more of your money to work, and pay less in interest. Boosting your credit score, paying down other debts, and comparison shopping are good strategies to get a lower interest rate on a home equity loan.
- What is a home equity loan?
- How to get the best interest rates
- How to get this type of loan
- Home equity loan alternatives
- FAQ
What is a home equity loan?
As you pay down your mortgage, you build up your home equity — the portion of the home you own. You can find it by subtracting your remaining mortgage from the current value of your home. When a home appreciates quickly, you can build equity faster.
A home equity loan lets you borrow a lump sum of cash using your equity as collateral. It’s a flexible way to get the funds you need for big expenses, like medical bills, home renovations, or a wedding. And since the loan is secured by your home, you may be able to find lower rates for a home equity loan than you would with a personal loan.
| Important: Home equity loans also carry risk. If you’re unable to repay the loan, the lender can foreclose on your home. |
With a home equity loan, you’re limited in the total amount you can borrow. Most home equity loan lenders restrict the loan amount to a percentage of the value of your home — an 85% combined loan-to-value ratio (CLTV) is typically the upper limit. To calculate your CLTV, add the amount you wish to borrow to your mortgage balance and divide it by your home’s current appraised value.
For example, say your home would be worth $300,000 if you were to sell it today. You still owe $200,000 on your mortgage, and you want to borrow $20,000. Your CLTV would be 73%:
$200,000 + $20,000 / $300,000 = 0.73
Typically, home equity loans are fixed-rate installment loans. Your interest rate stays the same throughout the repayment term, and you make set monthly payments until the loan is paid off.
Eligibility requirements for a home equity loan
Standard requirements for a home equity loan usually include:
- A good credit score, which is generally a 670 FICO score or higher
- Proof of income, such as pay stubs or bank statements
- A low debt-to-income ratio (DTI), which is your total monthly debt divided by your gross monthly income
- At least 15% equity in the home
How to get the best home equity loan interest rates
Getting a low interest rate on your home equity loan can save you money by reducing the cost of borrowing. Here are a few ways to get the best possible rates for your unique financial situation:
- Build your credit score: “The higher your score, the better your interest rate,” said Kristina Morales, a loan officer and real estate agent in Ohio. “Try to get your credit score above 700 for better rates.” You can build your credit score by making sure you’re caught up on monthly payments, making all future payments on time, and keeping your spending in check.
- Lower your DTI: If you can pay down some other debts, like credit card debt, you can improve your debt-to-income ratio. Lenders will see that you’ve freed up room in your budget, making it easier for you to repay a home equity loan (and lowering their risk in lending to you). “As you pay off your debt balances, this will improve not only your DTI but your credit score as well, which is directly tied to the interest rate available to you,” said Morales.
- Know your loan-to-value ratio (LTV): When you know your LTV (your mortgage balance divided by your home’s current value), you can make sure that the loan amount you request won’t bump your combined LTV over 85%.
- Compare lenders: Lenders vary in the terms they offer. You’ll have better luck snagging a good interest rate if you shop around.
How to get a home equity loan
Follow these steps to get a home equity loan:
- Determine how much equity you have: Check your mortgage statements for how much you’ve borrowed and how much you’ve paid off. You can also visit real estate websites that can give you an estimate of the value of your home, and compare this figure to your remaining loan balance to get an idea of your home equity.
- Figure out how much you need to borrow: If you want to use a home equity loan to finance a purchase, for example, determine how much money you need. You’ll want to make sure you have enough room in your budget to repay the home equity loan in addition to your other debts.
- Compare lenders: Look at home equity loan rates from multiple lenders to find the best terms for your budget. Some lenders allow you to prequalify for a loan on their website, which gives you a better idea of the terms you may be offered.
- Submit an application: When you’ve found a lender that fits, fill out an application, and be sure to include any required documentation.
- Close on the loan: Home equity loans typically close in about a month or two. Your lender will need to underwrite the loan, and that might require an appraisal to determine the most accurate value of the home. When you close, you’ll sign the final paperwork and prepare to receive your funds.
Home equity loan alternatives
If a home equity loan isn’t the right choice for you, consider these other options.
Home equity line of credit
A home equity line of credit (HELOC) is a little different from a home equity loan — you don’t receive the funds as a lump sum. Instead, it’s a line of credit that you draw on as you need money, up to a maximum limit (similar to a credit card). HELOCs usually have variable interest rates.
Cash-out refinance
Another way to tap into your home’s equity is to use a cash-out mortgage refinance. With this loan type, you take out a new mortgage for a greater amount than what you owe on your home, and receive the difference in cash at closing.
Personal loan
Personal loans are typically unsecured loans, so you won’t need to use your home as collateral. Instead, you simply borrow a lump sum, generally at a fixed interest rate, and pay it back over time (often two to five years).
Credit cards
Credit cards could be a way to bridge a funding gap for smaller amounts. If you can find a card with a low introductory rate (and you can pay it off before the card returns to its usual rate), this might be a good solution. Just be wary of carrying a balance — average credit card rates are north of 20% as of February 2023.
Home equity loan FAQ
Do you need an appraisal to get a home equity loan?
Lenders typically require an appraisal for a home equity loan since appraisals give a more accurate picture of a home’s value than real estate sites (which only give a rough estimate). Check with your chosen lender to be sure.
Are home equity loans tax-deductible?
In some cases, yes, you can deduct your home equity loan interest on your taxes, provided you used the funds to “buy, build, or substantially improve” your home, per the IRS. If you took out a home equity loan for this purpose before tax year 2018, or if you take one out after tax year 2025, you may be able to deduct the interest.
How much equity can you borrow from your home?
The exact amount you can borrow depends on the lender you choose, but typically you’ll be able to borrow up to 85% of your equity. That means if you have $100,000 in equity in your home, you’re able to borrow $85,000.
What’s the difference between a home equity loan and a home equity line of credit?
A home equity loan is also known as a second mortgage. It’s a lump sum you receive in cash and pay back in regular installments over time. A home equity line of credit, on the other hand, is a line of credit that’s available for you to draw from as needed. You only pay back what you borrow.