# What Is a Home Equity Loan? How It Works, Costs, and Alternatives By Opendoor Editorial Team | 2026-06-12 # What Is a Home Equity Loan? How It Works, Costs, and Alternatives A home equity loan is a fixed-rate, lump-sum loan that uses your home as collateral. You borrow against the equity you've built — the difference between your home's current market value and what you still owe on your mortgage — and repay it in equal monthly installments over 5 to 30 years ([CFPB](https://www.consumerfinance.gov/ask-cfpb/what-is-a-home-equity-loan-en-106/)). Because the loan is secured by your property, interest rates run lower than credit cards or personal loans, but the risk is real: miss enough payments and the lender can foreclose. This guide covers how home equity loans work, what they cost, how they compare to HELOCs and cash-out refinances, and when selling your home outright is a smarter way to access your equity. ## Key Takeaways - A home equity loan delivers a one-time lump sum at a fixed interest rate, repaid over 5–30 years, with your home serving as collateral (CFPB). - Most lenders require at least 15–20% equity, a credit score of 620 or higher, and a combined loan-to-value ratio at or below 85% (Rocket Mortgage). - Interest on a home equity loan is tax-deductible only when the funds are used to buy, build, or substantially improve the home securing the loan (IRS Publication 936). - Average home equity loan rates in 2026 range from about 7.5% to 10%, depending on credit profile and lender — higher than first-mortgage rates because the loan sits in second-lien position (Bankrate). - If you need more than 80–85% of your equity or want to avoid adding a second monthly payment, selling the home and collecting the proceeds at closing is an alternative worth comparing. ## How a home equity loan works You receive a single lump sum based on your available equity, then repay it in fixed monthly installments over a set term — the same way a traditional mortgage works, except this loan sits behind your primary mortgage as a second lien ([CFPB](https://www.consumerfinance.gov/ask-cfpb/what-is-a-home-equity-loan-en-106/)). ### How equity is calculated Equity equals your home's current market value minus your remaining mortgage balance. Here is a dollar example: - **Home's current market value:** $400,000 - **Remaining mortgage balance:** $250,000 - **Your equity:** $150,000 Most lenders cap borrowing at 80–85% of your home's appraised value minus your existing mortgage balance ([Rocket Mortgage](https://www.rocketmortgage.com/learn/home-equity-loan)). In the example above, if a lender allows 85% combined loan-to-value (CLTV), the maximum you can borrow is ($400,000 × 0.85) – $250,000 = $90,000. Not sure where your home's value stands? You can [find out what your home is worth](https://www.opendoor.com/articles/whats-your-home-worth-take-these-steps-to-find-out) through a comparative market analysis, an online valuation tool, or a professional appraisal. ### The repayment structure Once the loan closes and you receive the lump sum, your repayment works the same way every month for the life of the loan. The interest rate is fixed, so the payment amount never changes — a feature that makes budgeting straightforward. Terms range from 5 to 30 years ([Rocket Mortgage](https://www.rocketmortgage.com/learn/home-equity-loan)). Shorter terms mean higher monthly payments but less total interest; longer terms spread costs out but increase the total amount you pay over time. Because your home secures the debt, the lender can foreclose if you default ([CFPB](https://www.consumerfinance.gov/ask-cfpb/what-is-a-home-equity-loan-en-106/)). This is the core trade-off: you get a lower interest rate than unsecured debt, but your home is on the line. ## Home equity loan requirements Lenders evaluate four factors before approving a home equity loan: available equity, credit score, debt-to-income ratio, and a home appraisal. **Equity.** You need at least 15–20% equity in your home. A lender confirms the exact figure through a professional appraisal or an automated valuation model ([Rocket Mortgage](https://www.rocketmortgage.com/learn/home-equity-loan)). Understanding [what appraisers look for during a home appraisal](https://www.opendoor.com/articles/home-appraisal-tips-and-what-is-home-appraisal-based-on) helps you prepare. **Credit score.** Most lenders set a floor of 620, though some require 660 or higher for the most competitive rates ([Rocket Mortgage](https://www.rocketmortgage.com/learn/home-equity-loan)). A higher score lowers your rate because it signals lower default risk to the lender. **Debt-to-income (DTI) ratio.** Lenders want to see that your total monthly debt payments — including the new home equity loan — stay at or below 43% of your gross monthly income ([Bank of America](https://www.bankofamerica.com/mortgage/learn/what-is-a-home-equity-line-of-credit/)). **Home appraisal.** An appraisal confirms your home's current market value, which determines how much equity you have available. The [appraisal process](https://www.opendoor.com/articles/home-appraisal-guide-what-it-is-how-long-it-takes-what-to-expect) includes an in-person inspection of the property and a review of recent comparable sales in your area. Expect it to take 1–2 weeks to schedule and 3–7 days for the report. ## Home equity loan rates and costs Average home equity loan rates in 2026 range from about 7.5% to 10% ([Bankrate](https://www.bankrate.com/home-equity/home-equity-loan-rates/)). Rates are higher than first-mortgage rates because home equity loans sit in second-lien position — if you default, the first-mortgage lender gets paid before the home equity lender, which makes the second lien riskier for the lender ([Rocket Mortgage](https://www.rocketmortgage.com/learn/home-equity-loan)). ### Closing costs Closing costs on a home equity loan run 2–5% of the loan amount ([Bank of America](https://www.bankofamerica.com/mortgage/learn/what-is-a-home-equity-line-of-credit/)). On a $50,000 loan, that translates to $1,000–$2,500. These costs cover the appraisal, title search, origination fee, and recording fees. Some lenders waive closing costs in exchange for a slightly higher interest rate — ask before you apply. ### Sample monthly payment Here is what a $50,000 home equity loan looks like at 8.5% fixed over 15 years: - **Monthly payment:** approximately $492 - **Total interest paid over 15 years:** approximately $38,600 - **Total repaid:** approximately $88,600 The total cost illustrates why comparing this path against alternatives — including selling — matters before you commit. Knowing [how much it costs to sell a house](https://www.opendoor.com/articles/how-much-does-it-cost-to-sell-a-house) gives you a clearer picture of which option nets you more. ## Home equity loan vs. HELOC A home equity loan is a fixed-rate lump sum; a HELOC (home equity line of credit) is a variable-rate revolving credit line you draw from as needed during a draw period, then repay during a repayment period ([Bank of America](https://www.bankofamerica.com/mortgage/learn/what-is-a-home-equity-line-of-credit/)). | Feature | Home equity loan | HELOC | | --- | --- | --- | | How you receive funds | One-time lump sum | Draw as needed during 10-year draw period | | Interest rate | Fixed | Variable (tied to prime rate) | | Monthly payment | Same amount every month | Changes with balance and rate | | Best for | One-time, known expenses (roof replacement, debt payoff) | Ongoing or unpredictable expenses (rolling renovations, tuition over several years) | | Flexibility | Low — you borrow once | High — borrow, repay, re-borrow during draw period | | Risk if rates rise | None — rate is locked | Payment increases as rates climb | **Choose a home equity loan** when you know exactly how much you need and want predictable payments. **Choose a HELOC** when your spending will happen in phases and you want to borrow only what you use. Both carry foreclosure risk because both are secured by your home. If you are weighing either product against selling, the comparison shifts: selling converts all your equity to cash in a single transaction with no second monthly payment and no ongoing rate exposure. Understanding [how long it takes to sell a house](https://www.opendoor.com/articles/how-long-does-it-take-to-sell-a-house) helps you judge whether the timeline works for your situation. ## Home equity loan vs. cash-out refinance A cash-out refinance replaces your entire first mortgage with a new, larger mortgage and gives you the difference in cash. A home equity loan adds a second monthly payment without touching your first mortgage ([Rocket Mortgage](https://www.rocketmortgage.com/learn/home-equity-loan)). | Feature | Home equity loan | Cash-out refinance | | --- | --- | --- | | What it replaces | Nothing — adds a second lien | Replaces your entire first mortgage | | Interest rate | Fixed, higher (second-lien premium) | Fixed or adjustable, lower (first-lien position) | | Monthly payments | Two payments (first mortgage + equity loan) | One payment (new, larger mortgage) | | Closing costs | 2–5% of equity loan amount | 2–5% of entire new mortgage amount | | Best when | Your first-mortgage rate is low and you want to keep it | Your first-mortgage rate is higher than current rates, so refinancing saves money overall | | Impact on existing mortgage | None | Resets your mortgage term and balance | **The decision point:** if your first mortgage carries a rate below current market rates, a home equity loan lets you keep that rate and borrow separately. If your current rate is above the market, a cash-out refinance lets you lower your rate and access cash at the same time. Run the numbers on both paths — factoring in closing costs and [how mortgage rates work](https://www.opendoor.com/articles/how-mortgage-rates-work) — before committing. ## Pros and cons of a home equity loan **Pros:** - **Fixed rate, predictable payments.** Your monthly amount never changes, which simplifies long-term budgeting. - **Lower rates than unsecured debt.** Because the loan is secured by your home, rates are lower than credit cards (averaging 20%+) or personal loans (averaging 12%+) ([Bankrate](https://www.bankrate.com/home-equity/home-equity-loan-rates/)). - **Potential tax deduction.** Interest is deductible when the funds are used to buy, build, or substantially improve the home securing the loan ([IRS Publication 936](https://www.irs.gov/publications/p936)). - **Lump sum for large, one-time expenses.** Renovations that [increase home value](https://www.opendoor.com/articles/what-renovations-increase-home-value-the-most), debt consolidation, or education costs are common uses. **Cons:** - **Foreclosure risk.** Your home is the collateral. Defaulting on payments puts your ownership at stake ([CFPB](https://www.consumerfinance.gov/ask-cfpb/what-is-a-home-equity-loan-en-106/)). - **Closing costs add up.** Paying 2–5% of the loan amount in closing costs reduces the net benefit, especially on smaller loans. - **Reduces your ownership stake.** Borrowing against equity means you own less of your home until the loan is repaid. If home values decline, you can end up owing more than the property is worth. - **Less flexible than a HELOC.** You borrow once. If you need more later, you have to apply for a new loan. - **Second monthly payment.** Managing two mortgage payments increases financial pressure, especially during income disruptions. ## When selling makes more sense than borrowing Selling your home converts all your equity to cash in one transaction — no second monthly payment, no interest charges, and no foreclosure risk from an additional lien. When you sell, every loan secured by the property — including your first mortgage, any second mortgages, HELOCs, and home equity loans — is paid off from the seller's proceeds at closing. This path makes more sense than borrowing when: - **You need more than 80–85% of your equity.** Lenders cap home equity loans at that threshold. Selling unlocks your full equity minus [standard selling costs](https://www.opendoor.com/articles/how-much-can-you-expect-to-make-when-you-sell-your-home). - **You are already planning to move.** Taking a home equity loan, then selling within 1–3 years, means paying closing costs twice — once on the loan, once on the sale. - **You want to avoid a second monthly payment.** A home equity loan adds a fixed obligation for 5–30 years. Selling eliminates it entirely. - **Your home's value has peaked in your local market.** Selling locks in the value; borrowing against it leaves you exposed if values decline. Selling to Opendoor works differently from a traditional listing. You request an offer, receive a competitive cash offer within 24 hours, and choose your closing date — no showings, no staging, no waiting for a buyer's financing to clear. Opendoor analyzes 100+ comparable sales in your ZIP code to calculate the offer, and 98% of offers close on time. Average close time is 18 days. The 5% service fee is listed upfront with no hidden costs, and you see your final net proceeds before you commit. Learn more about [what a cash offer means and when it makes sense](https://www.opendoor.com/articles/what-is-a-cash-offer-in-real-estate-and-why-consider-it). ### Who this path is not for Opendoor isn't for sellers who want to stay in their home long-term and just need cash for a renovation or debt payoff — a home equity loan or HELOC is designed for exactly that situation. Opendoor is also not for sellers with highly customized luxury properties or homes outside Opendoor's 50+ active markets. If you have 60+ days, want to test the open market for the highest possible price, and are comfortable managing showings and buyer negotiations, [listing with a real estate agent](https://www.opendoor.com/articles/how-selling-to-opendoor-compares-to-a-traditional-home-sale) is worth comparing. The right choice depends on whether you value certainty and speed or maximum sale price. ## Top Questions People Ask About Home Equity Loans ### How is home equity calculated? Equity equals your home's current market value minus the total balance on all mortgages and liens secured by the property ([CFPB](https://www.consumerfinance.gov/ask-cfpb/what-is-a-home-equity-loan-en-106/)). If your home is worth $350,000 and you owe $200,000, your equity is $150,000. You build equity two ways: by paying down your mortgage principal and by your home increasing in value over time. Tracking [how your home's value changes](https://www.opendoor.com/articles/how-to-determine-home-value) helps you know where you stand. ### What is the difference between a home equity loan and a HELOC? A home equity loan gives you a single lump sum at a fixed interest rate; a HELOC gives you a revolving credit line at a variable rate that you can draw from over a 10-year period ([Bank of America](https://www.bankofamerica.com/mortgage/learn/what-is-a-home-equity-line-of-credit/)). The home equity loan is better for one-time, known expenses. The HELOC is better for ongoing costs where the total amount is uncertain. Both use your home as collateral, so both carry foreclosure risk. ### Is a home equity loan a good idea right now? It depends on what you need the money for and your ability to handle the second monthly payment. With rates averaging 7.5–10% in 2026 ([Bankrate](https://www.bankrate.com/home-equity/home-equity-loan-rates/)), a home equity loan still costs less than credit card debt or a personal loan. It makes the most sense for expenses that increase your home's value — like a [new roof](https://www.opendoor.com/articles/does-a-new-roof-increase-home-value-roi-costs-and-what-sellers-need-to-know) or a kitchen remodel — because the improvement can offset the borrowing cost. It makes less sense for discretionary spending or if the second payment strains your monthly budget. ### Can you get a home equity loan with bad credit? A credit score below 620 disqualifies you from most home equity lenders ([Rocket Mortgage](https://www.rocketmortgage.com/learn/home-equity-loan)). Some credit unions and specialty lenders work with scores in the 580–619 range, but the interest rate will be significantly higher and the maximum loan amount lower. Before applying, check whether a HELOC, a cash-out refinance, or selling the home entirely offers a better financial outcome at your credit level. ### Is the interest on a home equity loan tax-deductible? Yes, but only when you use the loan proceeds to buy, build, or substantially improve the home that secures the loan ([IRS Publication 936](https://www.irs.gov/publications/p936)). Using the money for debt consolidation, tuition, or a vacation does not qualify for the deduction. The combined mortgage debt eligible for the deduction is capped at $750,000 for loans originating after December 15, 2017 ($375,000 if married filing separately). Consult a tax advisor for your specific situation. ### How much can I borrow with a home equity loan? Most lenders limit borrowing to 80–85% of your home's appraised value minus your existing mortgage balance ([Rocket Mortgage](https://www.rocketmortgage.com/learn/home-equity-loan)). On a $400,000 home with a $250,000 mortgage, the maximum at 85% CLTV is $90,000. Your actual approval amount also depends on your credit score, DTI ratio, and the lender's specific policies. ### Can you sell a house that has a home equity loan on it? Yes. The home equity loan balance is paid off from the sale proceeds at closing, along with your first mortgage and any other liens. The remaining amount after all payoffs and [closing costs](https://www.opendoor.com/articles/how-much-does-it-cost-to-sell-a-house) is your net proceeds. If the sale price does not cover all outstanding balances, you need to bring cash to closing to cover the difference. ### What happens if you default on a home equity loan? The lender can initiate foreclosure proceedings because the loan is secured by your property ([CFPB](https://www.consumerfinance.gov/ask-cfpb/what-is-a-home-equity-loan-en-106/)). Before that stage, missed payments damage your credit score, and the lender will apply late fees. If you are struggling with payments, contact your lender early — many offer hardship programs, loan modifications, or temporary forbearance arrangements. ### Is an appraisal needed for a home equity loan? Most lenders require a full appraisal to confirm the current [fair market value](https://www.opendoor.com/articles/fair-market-value-of-a-home-what-it-means-and-how-to-find-it) of your home and calculate your available equity ([Rocket Mortgage](https://www.rocketmortgage.com/learn/home-equity-loan)). Some lenders accept automated valuation models (AVMs) or drive-by appraisals for lower loan amounts or borrowers with strong credit profiles. The appraisal cost — $400–$600 on average — is part of the closing costs the borrower pays. **Frequently asked questions** --- *Originally published at [https://www.opendoor.com/articles/what-is-a-home-equity-loan](https://www.opendoor.com/articles/what-is-a-home-equity-loan)*