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Home equity loans explained

Take advantage of the equity you’ve built up in your home by using it to finance your next big purchase.

Home equity loans can be a great way to help you take your next step, whether it be to a new car, to home renovations or to any other large purchase.

While car loans are the most common type of secured personal loans, a vehicle isn’t the only way to guarantee a loan. If you own your own home and have built up some equity in it, you can use that equity as a guarantee on your next loan. Find out how it works in this guide.

How does a home equity loan work?

A home equity loan works the same way as other secured personal loans. When you apply you will need to provide details of your mortgage, your personal financial position and the reason you’re taking out the loan. Your application will be assessed and if approved, you will be given a loan based on how much equity you hold and how much the lender thinks you can afford to repay.

How much you own in your home will be used as collateral for the loan. If you were to default on the loan, the lender could recoup its losses by taking ownership of that equity.

Compare home equity loans vs. personal loans

Calculating how much equity you have

Home equity is essentially the difference between your property’s value and any debt you hold against it. Typically, you’ll be able to borrow up to 80% to 90% of your home’s value minus the debt you hold against it. For example, if your home is worth $500,000 and you’ve paid off $300,000, you’ll have $200,000 left on your mortgage. Here’s how much you’ll be able to borrow with a home equity loan in that scenario:

  • 80% of a $500,000 home = $400,000
  • The amount of debt on the property = $200,000
  • Value minus debt = $200,000

Types of financing you can secure with your home equity

The types of loans available when using your equity give you real flexibility:

  • Secured personal loan. A secured loan is guaranteed by collateral you put up and can be used for any purpose. It is given to you in a lump sum and you pay it back in installments, usually over a period of one to seven years. As the loan is secured you can enjoy a more competitive rate.
    Compare secured vs. unsecured personal loans
  • Line of credit. As a continuous source of credit, you can draw on this loan as and when you need to. You’ll have access to the amount of credit that you’re secured for and be required to make regular repayments and as you repay the credit it will become available again. You may see this product marketed as a HELOC, or Home Equity Line of Credit.
Do I need to apply with the same lender I have for my mortgage?

No, you don’t. If you decide to apply with a different lender you will need to provide details of your mortgage, including your total loan and how much equity you hold.

Want to apply for an unsecured loan today? Consider these online lenders

Rates last updated September 25th, 2017

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Name Product Product Description Min. Credit Score Max. Loan Amount APR Requirements
Prosper Personal Loan
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680
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Good to excellent credit
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From 5.49% (fixed)
You must be a U.S. citizen or permanent resident, and 18 years or older.
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600
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From 15.49% (fixed)
Must have a fair credit score of 600 or better and verifiable income. Must live in a state where LendingPoint services.
Lending Club Personal Loan
Borrow up to $40,000 with rates from 5.99% to 35.89% APR based on your credit score.
660
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From 5.99% (fixed)
You must be over 18 years of age, a permanent resident of the US or an American citizen and have a steady source of income.
Even Financial Personal Loans
Get matched to the best loan offer instantly from top online consumer lenders.
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Must have a minimum credit score of 580+. Must be 18+ years old and be an American citizen or permanent resident.
Payoff Personal Loans
Pay down your debt with a fixed APR and one monthly payment.
660
$35,000
From 5.94% (fixed)
You must have a FICO score of 660 or higher, at least 3 years of credit history and a debt-to-income ratio of no more than 50%. You must live in a state where Payoff offers loans; check availability.
OneMain Financial Personal Loans
Get a personal or auto loan with a quick and easy application and dedicated customer support.
600
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Eligibility for a loan is determined by your financial history, credit history, income and expenses, and whether or not you have ever filed for bankruptcy.

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Is a home equity loan the same as a home equity line of credit (HELOC)?
Not quite. While both types of financing draw from your equity as a source of collateral, a home equity line of credit (HELOC) functions more like a credit card. You have a large amount of money you can draw from at any time for the loan period, usually 5 to 15 years.

A home equity loan usually has the same repayment period, but you’re advanced the lump sum immediately. Because of this, you must pay interest on the entire amount (like a regular mortgage). On the other hand, if you take out a HELOC, you only have to pay interest on the amount you borrow from the possible pool of funds — say $50,000 of the total $100,000.

What kind of purchases and investments can you make with a home equity loan?

While the loans themselves are secured, there aren’t many restrictions on how you use your loan. You can use the money for:

What are the benefits of home equity loans?

  • Competitive interest. Your loan is secured by a valuable and appreciating asset, your property, so you will usually get a competitive interest rate.
  • Flexible loan purpose. You can usually use the loan amount for whatever purpose you need.

Is there anything else to consider before applying?

This is a risky type of loan should you default. Failing to repay the loan could result in the lender taking the equity you have in the property to pay the loan. Before you apply, consider how financially stable you are and if this is the right type of loan for you to take out.

A home equity loan can offer you a low interest rate as well as a flexible way to finance a personal purchase. However, as there are risks involved, remember to consider all of your loan options before you apply.

Frequently asked questions

Yes. Because home equity loans are secured by using your house as collateral, they come with very low interest rates and long repayment periods. As long as you make regular payments on the interest and principal of your loan, there’s very little associated risk.

However, it’s important to keep in mind that home equity loans were part of the reason for the financial collapse in the late 2000s. Failure to repay your loan leads to defaulting, and defaulting leads to foreclosure. Always be sure you have the ability to repay before taking out a loan against your home.

There are two factors lenders consider when determining if they are willing to extend a loan to you.

First is your total debt. Your lender will add up everything you owe and how much your monthly repayments cost. If they see you have the ability to make the minimum payments after this, you’re more likely to get a loan.

Second, and most important, is your credit score. Just because you have the ability to repay doesn’t mean you will, and financial institutions rely on your credit history to see if you have a background of handling your debt well. A good credit score is crucial when taking out a home equity loan.

It’s possible. Since lenders use both your credit score and your total debt to determine your ability to repay, if you have a low debt threshold, you may be able to qualify for a small amount. If you don’t, you can try debt consolidation to build your credit up before you apply. It will take longer, but a good credit score is an excellent way to show you have what it takes to pay back your loan.
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