Fund your big ideas with a home equity loan

A home equity loan allows homeowners to borrow a fixed amount of money against the equity they already have in their property. Often referred to as a “second mortgage,” it provides a one-time lump sum of cash that the borrower repays in equal monthly installments over a fixed term. Because the home serves as collateral for the loan, interest rates are typically lower than those of unsecured personal loans or credit cards.

Unlike a line of credit, a home equity loan operates as a standard installment loan. Upon closing the loan, the borrower receives the entire loan amount as a single lump sum. Repayment begins immediately, with the borrower making fixed monthly payments that cover both principal and interest. The repayment term is set in advance — typically ranging from 5 to 30 years — ensuring the loan is fully paid off by a specific date.

A home equity loan provides a lump sum upfront with a fixed interest rate and consistent monthly payments, making it ideal for large, one-time expenses where budget stability is key. In contrast, a HELOC functions like a credit card with a variable interest rate, allowing borrowers to draw funds, repay them, and borrow again up to a limit during a “draw period” before entering a final repayment phase.

Lenders usually don’t place restrictions on how home equity loan funds are used, allowing homeowners to finance a wide variety of expenses. Common uses include funding major home improvements that may increase the property’s value, consolidating high-interest debt such as credit card balances, or covering significant costs like college tuition and medical bills. Financial experts often advise using these funds for purposes that improve a borrower’s financial position, rather than for discretionary consumer spending.

The borrowing limit is determined largely by the amount of equity available in the home and the lender’s maximum combined loan-to-value ratio, or CLTV. Most lenders allow homeowners to borrow up to 80% or 85% of the home’s appraised value, minus the balance of the existing mortgage. For example, if a home is valued at $300,000 and the homeowner owes $200,000, a lender with an 85% limit would allow a total debt of $255,000, leaving $55,000 available to be disbursed as a lump sum loan.

Borrowers typically need a credit score of at least 680 to qualify for a home equity loan from most major lenders, though requirements can vary. While some institutions may approve applicants with scores in the lower 600s, those with a score of 720 or higher generally secure the most favorable interest rates and terms. Lenders view your credit score as a key indicator of reliability, especially since the loan is a second lien on the property.

To qualify for a home equity loan, homeowners generally must retain at least 15% to 20% equity in their property after accounting for the new loan. This equity cushion protects the lender against fluctuations in the housing market and ensures the borrower is not overleveraged. If the total debt secured by the home exceeds 80% or 85% of its value, many lenders will deny the application due to the increased risk of default.

Home equity loans traditionally come with fixed interest rates that are locked in for the entire life of the loan. This means that a borrower's monthly payments generally remain the same from the first payment to the last, regardless of broader economic conditions or changes in the prime rate. This predictability makes home equity loans a popular choice for borrowers who prefer a stable, guaranteed payment schedule over the uncertainty of variable rates.