A home equity loan (HEL) is a second mortgage that allows you to tap a portion of your home’s value in a lump-sum payment. Home equity loans usually have fixed interest rates and are available in terms of five to 15 years.
Common reasons to take out a home equity loan are:
If you’re considering a home equity loan, a home equity loan calculator may give you an idea of how much you can borrow. You can typically access up to 85% of the value of your home, also known as your loan-to-value ratio (LTV). Some home equity lenders may approve you for a higher LTV, but it’s best to leave some equity in case home values fall or you need to sell your home.
Three pieces of information are needed to use a home equity loan calculator:
As you pay down your mortgage, you’ll build equity in your home. Home equity is the difference between how much you owe on your mortgage and your home’s value.
Once you’ve built a substantial amount of equity, you may want to tap it to fulfill other financial goals. Use our home equity loan calculator to learn how much you could borrow.
Enter the above information into the home equity loan calculator for an estimate of the amount you might be able to borrow.
When you take out a home equity loan, you receive all of the funds in a lump-sum payment. You’ll make fixed-rate, regular monthly payments for a set time period, usually between five and 15 years.
There are no prepayment penalties or annual fees, and you can pay extra every month to reduce the balance faster if you have some extra cash. Home equity loan rates are typically much lower than those for credit cards or personal loans, making these loans more attractive than other financial products when you need a large amount of cash upfront.
Closing costs for home equity loans range from 2% to 5% of your loan amount. Lenders may offer you a number of different closing cost options like discounts on fees, while others may offer a slightly higher rate for lower-cost options. The table below shows the most common home equity loan closing costs.
| Type of Fee | Amount | Why It’s Charged |
|---|---|---|
| Loan application fee | Varies | To set up your loan paperwork |
| Credit report fee | $17 to $75 | To check your credit history and FICO Scores |
| Processing and underwriting | $200 to $500 | To cover the lender’s costs for processing and approving your loan |
| Appraisal fee | $300 to $400 | To pay for an inspection and report that analyzes your home’s value |
| Tax monitoring and service fee | $85 to $100 | To verify that your property taxes are paid on time |
| Flood certification fee | $10 to $20 | To confirm whether or not the property is in a flood zone |
| Title search and lender’s title insurance | $1,000 to $1,500 | To protect the lender against financial loss if there are title claims on your home |
| Settlement fee | $150 to $750 | To pay the escrow officer or attorney for preparing and supervising the loan closing |
| Recording fee | $150 to $300 | To pay for recording the new lien on your home |
Home equity line of credit (HELOC)
A HELOC works similar to a credit card with a revolving line of credit that you can draw on when needed. Because your home is used as collateral to secure the loan, you could lose it if you fail to repay the HELOC.
Typical features include:
Cash-out refinance
If current rates are low, it may be worth replacing your existing mortgage with a larger loan amount and pocket the difference in cash with a cash-out refinance. As with home equity loans and HELOCs, your home is used to secure a cash-out refi, so you can lose it if you default on the loan.
Typical features include:
Reverse mortgage
Homeowners who are 62 years or older may be eligible for a reverse mortgage, which allows them to convert a portion of their home equity into a lump sum of cash, a line of credit, monthly income or a combination of all of the above.
Home equity is the difference between your home’s market value and what you currently owe. As you pay your mortgage balance down and home values increase over time, home equity usually grows, too.
To calculate how much home equity you have, subtract the outstanding loan balance from the value of your home. For example, if your home is worth $200,000 and your mortgage balance is $150,000, you have $50,000 of equity.
Most home equity lenders let you tap up to 85% of your home’s equity. Some lenders may allow you to borrow more.
Home equity loan interest rates change with the financial markets, but are typically lower than other forms of borrowing, such as personal loans or credit cards.
It may take two to four weeks to close on a home equity loan. You may receive the funds at closing or a few weeks later, depending on the lender.
Making late payments on a home equity loan could damage your credit score. If you default on a home equity loan, you could lose your home because your home is the collateral that secures the loan.
Yes, but interest rates will be higher and there will be more LTV restrictions.
If home equity loan funds are used for home improvement, the loan interest can be deducted on your annual tax bill.