Best Home Equity Loans – Borrow From Your Home's Value
Joy Wallet is advertiser-supported: we may earn compensation from the products and offers mentioned in this article. However, any expressed opinions are our own and aren't influenced by compensation. To read our full disclosure, click here.
If you're considering getting a loan, you may not have to look further beyond your home. Plus, a home equity loan may be a better option and easier to get than, say, a personal loan.
Home equity loans are for people who own a home, which is used as collateral to secure the loan. You basically take a loan against the equity you've built up in your home. You also generally get lower interest rates than other forms of credit that charge a higher interest rate. While that sounds enticing, you should know that the bank may take control of the property to cover its costs if you fail to make payments.
Before you go down this road, you should know the ins and outs of a home equity loan, which we'll walk you through.
Jump To
What is a home equity loan?
A home equity loan is a kind of consumer debt. Also called a second mortgage, homeowners can borrow cash by putting their property or homes as collateral. The loan amount is calculated by using the current market value of the house and the mortgage balance due. These loans come in two types:
- Home equity loan: This works much like a personal loan. You're given the full lump sum and pay the money back in fixed monthly installments.
- Home equity line of credit: Also known as HELOC, this opens up a line of credit for you to use as needed. The approval period for this type of loan is longer than receiving a lump sum, so you should plan it carefully. But the best part about the credit line is that you'll only repay the money you use, not the full line of credit made available to you.
Use Quicken Loans to Check Top Lender Rates
- Powerful home equity solutions
- Get transparent rates from providers
- TrustPilot Rating 4.6 out of 5
- Connect with lenders for $0
- 100% online experience
How to qualify for a home equity loan
Every lender has its criteria for evaluating an application, but in general, you can expect these requisites:
- Your equity in the home should be greater than 20% of the value of your home.
- You should be able to provide proof of income.
- You must have a credit score of more than 600.
- You must have a history of making payments on time.
Before you apply, you should take a few things into account.
Credit report
A borrower's credit score is one of the most important factors when applying for a loan. Each lender has its own rules, but you should have a score of more than 600. However, a FICO score of 700 or more provides you the best chance of securing a loan on favorable terms.
Related: Best Free Credit Reports
Debt-to-income ratio
Your debt-to-income ratio is calculated using your current debt versus your monthly income. While qualifying for a home equity loan, you must have a DTI of no more than 43%. If your DTI is higher, you should either hold off on the loan or devise strategies to repay existing debt.
Equity
The loan amount you can borrow directly depends on the home's equity. Most lenders assess a home's equity via the loan-to-value ratio, which represents the home's debt amount versus its current market value. At a minimum, you should have a 15% equity in the home.
Use Quicken Loans to Check Top Lender Rates
- Powerful home equity solutions
- Get transparent rates from providers
- TrustPilot Rating 4.6 out of 5
- Connect with lenders for $0
- 100% online experience
Best home equity loans
Discover
Discover offers home equity loans of $35,000 to $300,000 at APR of 8.49% and 13.99%. It doesn't charge an application, appraisal, commission, or closing costs. The whole application process can be done online without visiting a physical branch. The repayment term stretches over 10 to 30 years. To qualify, you must have a minimum credit score of 620 and a maximum debt-to-income ratio of 43%.
However, if you end up repaying Discover earlier than expected, the company may charge no more than $500 as closing costs. But this fee wouldn't apply to you if you're a New York, North Carolina, Connecticut, Minnesota, Texas, or Oklahoma resident.
BMO Harris Bank
Loan types include home equity loans, variable-rate HELOCs, and fixed-rate HELOCs. Loan amounts range from $25,000 to $150,000 at an APR of 7.74% to 13.01% for a home equity loan. You can repay the home equity loan in five to 20 years. The loans have a 10-year draw period with a repayment period of 20 years. Fixed-rate HELOCs can be repaid in five to 20 years.
Eligibility requirements include a minimum credit score of 700. However, the maximum debt-to-income ratio hasn't been specified; the lower, the better. BMO Harris Bank doesn't charge an application fee, and you don't have to worry about closing costs. You also have the flexibility to make your payments online, by mail, or in person at a branch.
KeyBank
You can take out home equity loans starting at $10,000 and HELOC of at least $10,000 through KeyBank. The company hasn't stated APR for the loans, but that for HELOC ranges between 2.49% and 18%. The loan repayment term is five to 30 years for home equity loans, and a 15-year draw and 20-year repayment apply to HELOC. Interest on the loan is fixed, while that on HELOC is variable, with up to three options to lock in a fixed rate.
The minimum credit score requirement is 660, and borrowers can avail of a 0.25% special discount on their home equity loans if they have a KeyBank checking or savings account.
U.S. Bank
U.S. Bank offers home equity loans and HELOCs between $15,000 and $750,000 (up to $1 million for properties in California) at an APR of 8.40% for the former and 8.95% to 13.10% for HELOC. You can pay off a home equity loan in up to 30 years, while HELOC comes with 10-draw and 20-year repayment periods. U.S. Bank does not charge its borrowers any closing fees, and you may receive a low APR if you have a checking account with the bank. On top of that, if you choose to autopay your monthly installments through a U.S. Bank checking or savings account, you may be entitled to a discount.
U.S. Bank takes on applicants with a credit score of 730 or higher.
Third Federal
Your loan options include taking out a loan of $10,000 to $300,000 as a home equity loan or HELOC. The APR for a home equity loan starts from 6.99%, while that for HELOC starts from 7.49%. The minimum requirements for borrowers eligible for Third Federal loans are unknown. The loan repayment term extends from five to 30 years for home equity loans, while HELOCs come with a 10-year draw and 30-year repayment periods.
Third Federal charges no origination fee or a prepayment fine, but it does deduct an annual fee of $65. However, this fee can be waived under certain circumstances.
Connexus Credit Union
Connexus offers home equity loans and HELOCs of at least $5,000. APR for the former is fixed at 6.89% for five years, while that for the latter is 5.99% till October 1, 2024, and 6.49% till April 1, 2025. You can repay the loan in 5 to 15 years, while HELOC comes with a 15-year draw and 15-year repayment periods. Eligibility requirements include a minimum credit score of 640 and a maximum debt-to-income ratio of 43%. With a home equity loan, Connexus lets you borrow up to 90% of the home's equity.
Related: Alternatives to Home Equity Loans
Use Quicken Loans to Check Top Lender Rates
- Powerful home equity solutions
- Get transparent rates from providers
- TrustPilot Rating 4.6 out of 5
- Connect with lenders for $0
- 100% online experience
Summary of best home equity loans
Lender | Products | Loan amount | APR | Minimum credit score |
Discover | Home equity loan | $35,000 to $300,000 | 8.49% to 13.99% | 620 |
BMO Harris Bank | Home equity loan, fixed and variable rate HELOC | $25,000 to $150,000 | 7.74% to 13.01%for home equity loan | 700 |
KeyBank | Home equity loan, HELOC | Loans starting at $10,000, HELOC from $10,000 | NA for loans, 2.49% to 18% for HELOC | 660 |
U.S. Bank | Home equity loan, HELOC | $15,000 and $750,000 | 8.40% for loans, 8.95% to 13.10% for HELOC | 730 |
Third Federal | Home equity loan, HELOC | $10,000 to $300,000 | Starts at 6.99% for loan, 7.49% for HELOC | NA |
Connexus Credit Union | Home equity loan, HELOC | Starting at $5,000 | 6.89% for loan, 5.99% for HELOC for first six months, then 6.49% | 640 |
Uses of home equity loans
The word "home" in these loans may imply the money can only be spent on items related to a home, but that's not always the case. From a usage perspective, a home equity loan is like a personal loan in that you're not restricted to using it in a certain manner. Do you want to use it for home renovations or debt consolidation? Go ahead. Start a business? You can. Pay medical hills? Yes, please. You can even not use the money and set it aside in an emergency fund for a rainy day. The uses are endless, and if you'd like, you can put the money to use in a home improvement project, too.
Home equity loans are funded quickly, making them a source of fast cash. You also get a better interest rate when compared to a credit card or other loans. The best part? You may even be able to deduct the interest you pay on the loan, but it's best to talk to your tax adviser to get detailed information on the topic.
What is LTV?
Loan-to-Value (LTV) ratio is a critical metric in the finance and real estate sectors, particularly in the context of mortgages and property loans. It represents the proportion of a property's value that is financed through a loan. To calculate the LTV ratio, the amount of the loan is divided by the appraised value or the purchase price of the property, whichever is lower. This figure is then converted into a percentage. For instance, if you take a loan of $80,000 to buy a house valued at $100,000, the LTV ratio would be 80% (calculated as $80,000 divided by $100,000, then multiplied by 100). The LTV ratio is a key indicator used by lenders to assess the risk of a loan. A higher LTV ratio suggests a higher risk, as it means more of the property's value is covered by debt, potentially affecting the terms or approval of the loan.
How does a home equity loan differ from a cash-out refinance?
Unlike a home equity loan, which is a separate loan on top of your first mortgage, a cash-out refinance replaces your existing mortgage with a new one. This new mortgage might have different terms and often a different annual percentage rate (APR). A cash-out refinance might also affect your mortgage payments differently than a home equity loan.
What is the maximum amount I can borrow with a home equity loan?
The maximum amount you can borrow with a home equity loan typically ranges from 75% to 90% of your home's value, accounting for any existing mortgage payments. This is known as a combined loan-to-value ratio. Your credit score and debt-to-income ratio are critical factors in determining this amount.
Are home equity loan interest rates fixed or variable?
Home equity loans usually come with fixed interest rates, ensuring consistent monthly payments throughout the life of the loan. However, some lenders may offer loans with variable rates, potentially including a rate discount for certain qualifications.
Is the interest on home equity loans tax deductible?
The interest on home equity loans may be tax-deductible, but it depends on how you use the loan. It's best to consult a tax professional to understand how this applies to your real estate and financial situation.
What are the risks of a home equity loan?
The primary risk of a home equity loan is foreclosure if you're unable to make the payments. This type of loan adds to your debt and decreases the equity in your home, potentially affecting future real estate transactions.
What are alternatives to home equity loans?
Alternatives to home equity loans include cash-out refinancing, which replaces your first mortgage with a new mortgage, personal loans, and credit cards with low interest rates. Each option comes with its own terms, conditions, and impacts on your annual percentage rate and overall financial health.
Are there rate discounts available on home equity loans?
Some lenders offer rate discounts for certain conditions, such as setting up automatic payments from a checking or savings account. These discounts can reduce the overall interest rate of the home equity loan.
What does "life of the loan" mean?
"Life of the loan" refers to the duration over which the loan is repaid. For home equity loans, this can vary, typically ranging from 5 to 30 years. The terms affect both the monthly payment amount and the total interest paid over the life of the loan
The bottom line
Home equity loans allow homeowners to take out a loan against the equity in their home on flexible loan terms. These loans have two types — a lump sum or one providing access to cash, as needed. Your credit history, credit score, and debt-to-income ratio are some data points a lender may consider before giving you the money. The lender we've mentioned here gives you access to these secured loans in exchange for putting the house as collateral.
Joy Wallet is an independent publisher and comparison service, not an investment advisor, financial advisor, loan broker, insurance producer, or insurance broker. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. They are not intended to provide investment advice. Joy Wallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. We encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Featured estimates are based on past market performance, and past performance is not a guarantee of future performance.
Our site doesn’t feature every company or financial product available on the market. We are compensated by our partners, which may influence which products we review and write about (and where those products appear on our site), but it in no way affects our recommendations or advice. Our editorials are grounded on independent research. Our partners cannot pay us to guarantee favorable reviews of their products or services.
We value your privacy. We work with trusted partners to provide relevant advertising based on information about your use of Joy Wallet’s and third-party websites and applications. This includes, but is not limited to, sharing information about your web browsing activities with Meta (Facebook) and Google. All of the web browsing information that is shared is anonymized. To learn more, click on our Privacy Policy link.
Writer
Jasir Jawaid is Joy Wallet's Assistant Editor. He has more than 13 years of experience as a journalist covering Wall Street, equities, financial policy and regulation, and cryptocurrency and blockchain.
Share this article
