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Understanding how home equity loans work might be one of the most important financial decisions you'll make as a homeowner. The term "home equity loan" serves as a catch-all for different ways the equity in your home can be used to access cash. Think of it like this: you've been building equity through your mortgage payments and property appreciation, and now you're exploring whether tapping that equity makes financial sense.
The most common types of home equity loans include fixed-rate home equity loans, home equity lines of credit referred to as HELOCs, and cash-out refinancing. The best type of home equity loan option for you will depend on your specific needs. That's why it's helpful to know the characteristics of each option before you do an informed home equity loan comparison.
When folks think of home equity loans, they typically think of either a fixed-rate home equity loan or a home equity line of credit. There's a third way to use home equity to access cash, and that's through a cash-out refinance. Each serves different purposes, and knowing which fits your situation saves both time and money.
With fixed-rate home equity loans or HELOCs, the primary benefit is that the borrower may qualify for a better interest rate using their home as collateral compared to an unsecured loan. An unsecured loan is one that's not backed by collateral. Some people with high-interest credit card debt may choose to use a lower-rate home equity loan to pay off those credit card balances, for instance.
This approach does not come without risks. Borrowing against a home could leave it vulnerable to foreclosure if the borrower is unable to pay back the loan. A personal loan may be a better fit if the borrower doesn't want to put their home up as collateral. The trade-off is typically a higher interest rate on personal loans since lenders face more risk without collateral backing the debt.
How much a homeowner can borrow is typically based on the combined loan-to-value ratio, or CLTV ratio, of the first mortgage plus the home equity loan. For many lenders, this figure cannot exceed 85% CLTV. To calculate the CLTV, divide the combined value of the two loans by the appraised value of the home. So if your home appraises at $400,000 and you owe $200,000 on your first mortgage, lenders would typically allow you to borrow up to $140,000 through home equity financing. That calculation comes from 85% of $400,000 equaling $340,000, minus your existing $200,000 mortgage balance.
The home equity lending landscape looks quite different heading into 2026 compared to where rates stood just 18 months ago. According to Bankrate's national survey conducted in December 2025, average home equity loan interest rates have declined to some of the lowest levels seen throughout 2025. The benchmark rates for a $30,000 home equity loan with a FICO score of 700 and 80% combined loan-to-value ratio currently sit at 7.99% for five-year terms, 8.18% for 10-year terms, and 8.13% for 15-year terms.
This represents a meaningful shift from rates that approached 9% during 2024. The Federal Reserve has implemented several quarter-point interest rate cuts through 2025, with reductions in September, October, and December helping push home equity rates downward. While the Fed kept rates unchanged at their January and March 2025 meetings, the cumulative effect of 2024 and late 2025 cuts continues benefiting home equity borrowers.
Home equity line of credit rates tell a similar story. U.S. Bank reports HELOC rates ranging from 7.20% APR to 10.85% APR as of December 11, 2025. These variable rates adjust monthly based on the prime rate published in the Wall Street Journal. Rates vary due to changes in the prime rate, credit limits below $50,000, loan-to-value ratios above 60%, and credit scores less than 730.
LendingTree data shows current home equity loan rates for $50,000 borrowing amounts are as low as 6.49% for the most qualified borrowers. These rates reflect conditional offers for both home equity loans and home equity lines of credit with 30-year repayment periods presented to consumers nationwide through their network partners.
The broader context matters here. CBS News reported in August 2025 that home equity loan interest rates hit their lowest point of 2025 at just 8.22%, marking a significant decline from earlier in the year. This downward trajectory continued through fall, with rates dropping to approximately 8.04% to 8.17% by year end.
Fixed-rate loans are pretty straightforward in how they work. The lender provides one lump-sum payment to the borrower, which is to be repaid over a period of time with a set interest rate. Both the monthly payment and interest rate remain the same over the life of the loan. This predictability makes budgeting easier since you know exactly what you'll pay each month for the entire loan term.
Fixed-rate home equity loans typically have terms that run from five to 30 years, and they must be paid back in full if the home is sold. The loan becomes part of your total debt obligation tied to the property, which means it factors into your equity calculations if you sell or refinance.
With a fixed-rate home equity loan, the amount of closing costs is usually similar to the costs of closing on a home mortgage. When shopping around for rates, ask about the lender's closing costs and all other third-party costs. For example, the cost of the appraisal might be passed on to you. These costs vary significantly from bank to bank, so comparing multiple lenders helps identify the most cost-effective option.
This loan type may be best for borrowers with a one-time or straightforward cash need. Let me give you a real-world example. Let's say a borrower wants to build a $20,000 garage addition and pay off a $4,000 medical bill. A $24,000 lump-sum loan would be made to the borrower, who would then simply pay back the loan with interest over the agreed term. This option could also make sense for borrowers who already have a mortgage with a low interest rate and may not want to refinance that loan through a cash-out refinance.
According to RefiGuide's 2026 home equity market analysis, traditional fixed-rate home equity loans represent approximately 60% of the home equity market share, with volume exceeding $150 billion annually. These loans remain popular for debt consolidation, major home improvements, and other significant one-time expenses where borrowers value payment predictability.
The mathematics of fixed-rate home equity loans make them particularly attractive for borrowers who want certainty. Using current rates from Bankrate as an example, a $50,000 home equity loan at 8.18% over 10 years results in a monthly payment of approximately $610. Over the life of the loan, you would pay roughly $23,200 in interest. While that might sound like a lot, compare it to carrying $50,000 in credit card debt at 23% APR, where you'd pay dramatically more in interest even if you aggressively paid down the balance.
A HELOC is revolving debt, which means that as the balance borrowed is paid down, it can be borrowed again during the draw period. This differs fundamentally from a home equity loan that provides one lump sum and that's it. The revolving nature makes HELOCs function similarly to credit cards, except with much lower interest rates and your home as collateral.
Let me walk you through how this works with a concrete example. Let's say a borrower is approved for a $10,000 HELOC. They first borrow $7,000 against the line of credit, leaving a balance of $3,000 that they can still draw against. The borrower then pays $5,000 toward the principal, which gives them $8,000 in available credit again. This flexibility continues throughout the draw period.
HELOCs have two distinct periods of time that borrowers need to be aware of: the draw period and the repayment period. Understanding these phases is critical to managing a HELOC effectively.
The draw period is the amount of time the borrower is allowed to use, or draw, funds against the line of credit. This commonly lasts 10 years. After this amount of time, the borrower can no longer draw against the funds available. During the draw period, many lenders allow interest-only payments, which keeps monthly costs lower but doesn't reduce the principal balance.
The repayment period is the amount of time the borrower has to repay the balance in full. The repayment period lasts for a certain number of years after the draw period ends. So, for instance, a 30-year HELOC might have a draw period of 10 years and a repayment period of 20 years. Some buyers only pay interest during the draw period, with principal payments added during the repayment period. This structure means your payments can increase substantially once you enter the repayment phase.
A HELOC may be best for people who want the flexibility to pay as they go. For an ongoing project that will need the money portioned out over longer periods of time, a HELOC might be the best option. While home improvement projects might be the most common reason for considering a HELOC, other uses might include wedding costs, business startup costs, or funding a child's college education over multiple years.
Unlike the rate on a fixed-rate loan, a HELOC's interest rate is variable and will fluctuate with market rates. This means that rates could increase throughout the duration of the credit line. The monthly payments will vary because they're dependent on the amount borrowed and the current interest rate.
When you take out a HELOC, you'll start out in the draw period. Once you take out funds, you'll be charged interest on what you've withdrawn. With some HELOCs, during the draw period, you're only required to pay that interest. Others charge you for both interest and principal on what you've withdrawn. During the repayment period, you won't be able to withdraw money any longer, but you will need to make regular payments to repay the principal and interest on what you withdrew.
The variable nature of HELOC rates means you're taking on interest rate risk. CBS News analysis from late 2025 noted that while HELOC rates hit their lowest point since 2023 earlier in the year, rates began climbing by mid-year. At one point, HELOCs were more than two full percentage points below home equity loans, making them the more affordable option. However, that gap narrowed considerably, with HELOC rates reaching approximately 8.20% on average by late 2025, virtually identical to home equity loan rates.
According to industry experts quoted by CBS News, homeowners with nearly $36 trillion in collective equity as of the second quarter 2025 have substantial borrowing capacity. The average individual homeowner has about $313,000 in home equity available to borrow from, accounting for the conventional 20% equity buffer many lenders require borrowers to keep in their home.
These equity levels represent an all-time high. Just think about what that means for homeowners who bought properties five or 10 years ago. Property appreciation combined with mortgage principal paydown has created significant borrowing capacity for millions of American homeowners.
Home equity loans and HELOCs both come with closing costs and fees, which may be anywhere from 1% to 5% of the loan amount. What those fees are and how you pay them can vary by loan type. HELOCs may involve fewer closing costs than home equity loans upfront, but often come with other ongoing costs like annual fees, transaction fees, and inactivity fees that don't pertain to fixed-rate home equity loans.
Generally, under federal law, fees should be disclosed by the lender. However, there are some fees that are not required to be disclosed. Borrowers certainly have the right to ask what those undisclosed fees are. Being proactive about understanding all costs helps you make accurate comparisons between lenders.
Fees that require disclosure include application fees, points, annual account fees, and transaction fees, to name a few. Lenders are not required to disclose fees for things like photocopying related to the loan, returned check or stop payment fees, and others. The Consumer Finance Protection Bureau provides a loan estimate explainer that will help you compare different estimates and their fees.
Here's what I typically advise: when you receive loan estimates from different lenders, create a simple spreadsheet comparing not just the interest rates but also all the fees side by side. Sometimes a loan with a slightly higher rate but lower fees ends up being less expensive overall, especially for larger loan amounts or longer terms.
The tax treatment of home equity interest changed significantly with recent tax legislation. Interest on home equity loans and HELOCs is only deductible if the funds are used to buy, build, or substantially improve the home securing the loan. This represents a narrower application than what existed before the Tax Cuts and Jobs Act of 2017.
What's more, there's a maximum of $750,000 on the amount of mortgage interest you can deduct. For spouses filing separately, that limit drops to $375,000 each. These limits apply to the combined total of your first mortgage and home equity debt.
Here's a practical example of how this works. If you take out a $50,000 home equity loan to renovate your kitchen and add a bathroom, that interest is potentially tax deductible since you're substantially improving the home. However, if you take out the same $50,000 home equity loan to pay off credit card debt or buy a boat, the interest is not tax deductible under current tax law.
Checking with a tax professional to understand how a home equity loan or HELOC might affect your specific financial situation is recommended. Tax rules can be complex, and your individual circumstances matter significantly in determining what deductions you can claim.
Mortgage refinancing is the process of paying off an existing mortgage loan with a new loan from either the current lender or a new lender. Common reasons for refinancing a mortgage include securing a lower interest rate, or either increasing or decreasing the term of the mortgage. Depending on the new loan's interest rate and term, the borrower may be able to save money in the long term.
With a cash-out refinance, a borrower may be able to refinance their current mortgage for more than they currently owe and then take the difference in cash. For example, let's say a borrower owns a home with an appraised value of $400,000 and owes $200,000 on their mortgage. They would like to make $30,000 worth of repairs to their home, so they refinance with a $230,000 mortgage, taking the difference in cash.
As with home equity loans, there typically are some costs associated with a cash-out refinance. Generally, a refinance will have higher closing costs than a home equity loan. This is because you're essentially taking out an entirely new first mortgage, which involves many of the same processes and fees as your original home purchase.
This loan type may be best for people who would prefer to have one consolidated loan and who need a large lump sum. But before pursuing a cash-out refinance, you'll want to look at whether interest rates will work in your favor. If refinancing will result in a significantly higher interest rate than the one you have on your current loan, consider a home equity loan or HELOC instead. The math needs to make sense.
A cash-out refinance is worth looking into when you've built up equity in your home but feel that your mortgage terms could be better, and you need a lump sum. Let's say you want to renovate your kitchen, and you need $40,000. You've had your mortgage for a few years but your credit score has improved since you got it and you could be eligible for a significantly better interest rate now.
That combination of factors makes a cash-out refinance worth considering. The improved credit score might get you a lower rate. The lower rate could offset the costs of refinancing. And you get your $40,000 for the kitchen renovation in the process. If a refinance would not make sense for you based solely on rate and term improvements, then a cash-out refinance probably wouldn't either. Instead, you might want to consider a traditional home equity loan or HELOC.
From my experience helping families navigate these decisions, timing matters enormously with cash-out refinances. If you bought your home when rates were 3% and current rates are 7%, a cash-out refinance likely doesn't make financial sense even with your higher credit score. You'd be trading a great rate for a mediocre one. In that scenario, a home equity loan or HELOC preserves your low first mortgage rate while still giving you access to funds.
Cash-out refinances involve both advantages and drawbacks. Understanding these trade-offs helps you make informed decisions about whether this strategy fits your situation.
The advantages include allowing you to access a lump sum of cash for major expenses or investments. Cash-out refinances can potentially give you a lower mortgage rate if market conditions have improved since you originally borrowed. They may let you change your mortgage terms to adjust your payments, such as switching from a 30-year to a 15-year term or vice versa. You end up with a single mortgage payment instead of managing both a first mortgage and a second mortgage.
The disadvantages center on risk and cost. A cash-out refinance uses your home as collateral, just like any mortgage. While you're replacing one mortgage with another rather than adding debt, you're still putting your home at risk if you can't make payments. The refinance requires you to pay closing costs, which typically range from 2% to 5% of the new loan amount. On a $230,000 refinance, that could mean $4,600 to $11,500 in closing costs. You'll restart your mortgage term unless you specifically choose a shorter term, which could mean paying interest for many more years.
The different types of home equity loans all allow you to draw on the equity you've built in your home to access funds. But each type has different strengths and weaknesses. The best type of home equity loan option for you will depend on your situation and the characteristics of the loan.
If you're content with your mortgage, meaning you don't think you could get a better rate and your payments fit your budget, and you need a lump sum all at once, a home equity loan might make the most sense. To consolidate high-interest debt, fund a major home renovation, or cover significant medical expenses, this might be a good option. The fixed rate and predictable payments make budgeting straightforward.
If your mortgage is fine and you need funds for a project that's going to require withdrawals over time, a HELOC might be a good fit. Say you're financing your child's college education over four years or starting a new business where you'll need capital in stages. Having a line of credit to draw on when you need it could be extremely helpful. You only pay interest on what you actually borrow, which can be more efficient than taking a large lump sum upfront.
Finally, if you're looking for a lump sum and you feel that your mortgage isn't a good fit, a cash-out refinance could be for you. Perhaps you could get a lower interest rate now, or you'd like your term to be shorter and can afford the higher payments. In that case, a cash-out refinance could be useful. You're accomplishing two goals simultaneously: improving your mortgage terms and accessing cash.
Industry experts speaking to CBS News in late 2025 emphasized that choosing between these options in 2026 comes down to following the market and your personal finances. If you're willing to forego potentially lower rates for flexible financing amid volatile home renovation material prices, then a HELOC could be the better option. But if you want to secure a low, fixed rate for a fixed funding amount, then a home equity loan is worth considering.
As you do your home equity loan comparison and think about your options, it's important to consider carefully what will really work best for you. These are the questions I encourage families to review before making a decision.
Will you be able to handle the additional debt in your budget? This isn't just about whether you can afford the monthly payment right now. Think about whether you could still afford it if your income decreased or your expenses increased. Building in a safety margin matters.
Do you need an upfront cash sum or access to funds over time? This question helps narrow your choices significantly. If you need $50,000 for a specific project that starts next month, a lump sum makes sense. If you need access to funds over the next several years, revolving credit offers more flexibility.
Can you realistically improve significantly on your current mortgage terms? If you bought or refinanced in the last few years when rates were historically low, a cash-out refinance probably doesn't make sense. The rate environment matters enormously to this decision.
Is what you stand to gain worth more than the price of your closing costs and any other fees involved? Run the numbers carefully. Sometimes the costs of accessing equity outweigh the benefits, especially for smaller loan amounts or short holding periods.
Are you okay with payments that vary or would you prefer knowing that your payments will stay the same? This comes down to your personal risk tolerance and financial stability. Variable payments work well for some people but create stress for others.
Are you comfortable knowing that your lender may be able to foreclose on your home if you can't make your payments? This is perhaps the most important question. You're putting your home at risk. Make sure the purpose for borrowing is worth that risk.
There are three main types of home equity loans: a fixed-rate home equity loan, a home equity line of credit or HELOC, and a cash-out refinance. Just as with a first mortgage, the process will involve a bank or other creditor lending money to the borrower, using real property as collateral, and requiring a review of the borrower's financial situation.
Keep in mind that cash-out refinancing is effectively getting a new mortgage, whereas a fixed-rate home equity loan and a HELOC involve another loan. That's why fixed-rate home equity loans and HELOCs are referred to as second mortgages. They're additional debt secured by your property, sitting behind your first mortgage in priority.
While each can allow you to tap your home's equity, what's unique about a HELOC is that it offers the flexibility to draw only what you need and to pay as you go. This can make it well-suited to those who need money over a longer period of time, such as for an ongoing home improvement project or funding education expenses across multiple years.
Current market conditions favor borrowers in many ways. With rates near 2025 lows and substantial equity built up in homes across America, access to affordable financing exists for homeowners who need it. The Mortgage Bankers Association projects home equity loan originations will surge 12% year-over-year in 2026, driven by homeowners tapping $30 trillion in tappable equity for renovations, debt consolidation, and investments.
Just breathe. Take your time evaluating which option fits your needs. The decision matters, but you don't have to rush it. Compare offers from multiple lenders. Understand all the terms and fees. Make sure the math works for your budget not just today but over the full term of the loan.
If you're ready to explore home equity financing options, AmeriSave offers home equity loans and HELOCs that can help you tap into the equity you've built in your home. Our mortgage specialists can walk you through your options and help you understand which approach makes the most sense for your financial situation.
The biggest problem with a home equity loan is that your home is the collateral for the loan. If you couldn't pay your home equity loan because you were having money problems, you could lose your home. This is the biggest risk you should think about. A second thing to think about is that a home equity loan gives you a large amount of money all at once. If you're not sure how much money you need to borrow, you might want to look into a home equity line of credit (HELOC) instead. This lets you borrow only what you need when you need it.
There are also other problems, like the closing costs, which can be high, and the fact that you're lowering your available equity. This is important if you want to sell your home or if property values go down. You won't be able to use any of the remaining equity until you pay off the home equity loan with the money you get from the sale.
The cost of a $50,000 home equity loan will depend on the interest rate and length of the loan you choose. If you borrowed $50,000 at an 8.18% rate for 10 years, your monthly payment would be about $610, based on current market rates from late 2025. You would pay about $23,200 in interest over the life of the loan.
If you took out a loan for 15 years at 8.13%, your monthly payment would go down to about $480, but you would have to pay about $36,400 in interest over the life of the loan. You will pay a lot more interest over time, but your monthly payment will be lower. If you choose a shorter five-year term at 7.99%, your monthly payment would go up to about $1,014, but your total interest would only be about $10,840.
These calculations show why the length of time you choose is so important to the total cost. If you choose shorter terms, your monthly payments will be higher, but your total interest costs will be much lower. Longer terms help you make payments, but they cost more over time.
You can usually use a home equity loan for almost anything you want. People often get home equity loans to pay off high-interest debt, pay for medical bills, or make big repairs or upgrades to their homes. Some people use home equity loans to pay for school, start a business, or make big purchases.
It's important to keep in mind that your house is the loan's collateral. You should only use this if you are sure that it is worth the risk of losing your home if you can't pay it back. It makes sense from a practical point of view to use home equity to turn credit card debt with a 23% APR into a loan with an 8% APR. Taking a luxury vacation with home equity might not be the best way to use this loan.
Also, keep in mind that the IRS only lets you deduct home equity interest from your taxes if the money is used to buy, build, or make major improvements to the home that secures the loan. You can use the money for other things, but you won't be able to deduct the interest from your taxes.
Most of the time, you need to own a home and have at least 20% equity in it to get a home equity loan. Most automated approvals will only happen if your credit score is at least 620. However, the best rates (7% to 8.5%) and highest borrowing limits are available to people with credit scores between 680 and 740. Your debt-to-income ratio is another thing that lenders look at. It usually needs to be less than 43%.
RefiGuide's 2026 study says that lenders will get tri-merge credit reports from Equifax, Experian, and TransUnion. They will look at your payment history, your current debts, and how stable your income is. Depending on the loan program, most lenders will want to see proof of steady, reliable income in the form of pay stubs, tax returns, or bank statements.
The combined loan-to-value ratio is also very important. This compares the amount of your mortgage debt to the value of your home. Most lenders set a limit on CLTV at 85%, but some special programs let it go up to 90%. The type of property you own is also important. Single-family homes get the best terms. Second homes and investment properties have to meet stricter standards and pay higher rates.
A home equity line of credit (HELOC) and a cash-out refinance are two ways to get cash from your home equity, but they work in very different ways. You can get a revolving line of credit with a HELOC by putting your home up as collateral. During the first draw period, which usually lasts 10 years, you can take out cash as you need it, up to a certain limit. During the repayment period that comes after, you pay back the money you borrowed plus interest. Your first mortgage stays the same.
A cash-out refinance means getting a new mortgage for more than what you owe now and getting the difference in cash. You're getting a new, bigger mortgage to replace your first one. This means you'll only have to make one mortgage payment, but your loan term will start over and your interest rate will be whatever the current market rates are when you refinance.
The main difference is that a HELOC gives you a second mortgage while keeping your first one. A cash-out refinance pays off your first mortgage in full. A HELOC keeps your current mortgage rate if you have a good one. If the current rates are better than your current rate, a cash-out refinance lets you get cash and lower your rate.
According to industry data, getting a home equity loan or HELOC in 2026 usually means going through a simple application process that takes two to four weeks from preapproval to closing. Depending on how quickly you send in the paperwork and how well the lender works, this timeline may change. If there are any problems with the appraisal or title work, it may also change.
Preapproval is the first step, and most lenders can do it in just a few days after looking at your credit, income, and property information. It usually takes one to two weeks to plan and finish the appraisal. Title work and final underwriting take another week or two. Once your loan is approved, you usually have to wait three business days after closing before you can get your money. This is required by federal law so that you have time to change your mind.
Automated systems are used by banks like Chase and credit unions to do the first screening. Then, for edge cases, people look at the applications by hand. Getting all of your paperwork in order, such as recent pay stubs, tax returns, and information about your current mortgage, makes the process go much faster.
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