How a home equity loan works
You build equity in your home by making monthly mortgage payments. Once you’ve paid at least 15%-20% of your home’s value, you can borrow against that amount with a home equity loan. You’ll receive the money you borrow as a lump sum with a fixed interest rate.
Shopping around to multiple lenders can help ensure that you get the best rate. Your home equity loan rate is determined by financial qualifications, such as your debt-to-income ratio, credit score and the amount of equity that you’re borrowing.
MORE NERDY PERSPECTIVE 🤓
 | How can I get the best home equity loan rates? The best interest rates for home equity loans tend to go to borrowers with the highest credit scores and lowest amounts of debt. If you're planning to apply for a home equity loan, my best advice is to get your financial profile in shape first— you can save thousands in interest payments. - Taylor Getler, Lead Writer, Mortgages |
Alternatives to a home equity loan
Home equity loans aren’t your only option for accessing equity. HELOCs and cash-out refinances also allow you to turn some of your home equity into cash.
Remember: Your home is the collateral here, so it's safest to use the cash in a way that will improve your financial position. For example, your equity could pay for home renovations that add to the value of your home.
Here’s what to know when you're comparing home equity loans, HELOCs and cash-out refinances.
Is a line of credit that you borrow against as you need it. You don’t need to know exactly how much you’ll need beforehand, just an estimate.
Has an adjustable interest rate. This means that your interest rate will change over the life of the loan. Some lenders also offer a fixed-rate option.
Check out NerdWallet's best HELOC lenders.
Features of the loan | HELOC | Home equity loan |
|---|---|---|
Loan funding | You can draw funds as needed, up to a certain limit (typically a percentage of your equity). | You receive a lump sum at closing (typically a percentage of your equity). |
Terms | Begins with a draw period (typically 10 years) with interest-only minimum payments. This is followed by a repayment period (often up to 20 years) that requires you to pay back principal and interest. | Repayment periods are often up to 30 years. Minimum payments include both interest and principal. |
Rates | Variable, (though some lenders offer a fixed-rate option) | Fixed |
Borrowing limits | You can typically borrow between 80%-85% of the equity in your home. Some lenders allow for more. Use NerdWallet's HELOC calculator for personalized details. | You can typically borrow between 80%-85% of the equity in your home. Some lenders allow for more. Use NerdWallet’s home equity loan calculator for personalized details. |
Lenders |
Replaces your mortgage with a larger new loan.
You get the difference between the new higher loan amount and the amount owed as a cash payment.
Interest rates are generally higher than a standard refinance, but lower than home equity loans or HELOCs.
Check out NerdWallet's best lenders for a cash-out refinance.
Frequently asked questions
- What is a good rate for a home equity loan?
Home equity loan rates vary from day to day and from one lender to another. To make sure you're getting a good home equity loan rate, compare offers from at least three lenders. It may seem simpler to get a home equity loan from your current mortgage lender, but that might not get you the best deal.
- What is the current average rate for a home equity loan?
Home equity loan rates are influenced by a base rate called the prime rate. Lenders will add a margin to the prime rate based on your borrower qualifications. Your qualifications include your credit score, debts and income.
- What credit score do you need to get a home equity loan?
You'll need a credit score that is at least 620 to qualify for a home equity loan. A higher score will help you qualify with more lenders.
You may also need to have at least 20% home equity. This means the remaining balance on your original mortgage is no more than 80% of your home's current value.
