Home equity loans and home equity lines of credit, or HELOCs, let homeowners borrow against the value they have built in their properties by paying down a mortgage or buying a home outright with cash. Because the loan is secured by the house, the interest rate is often lower than what you might get with an unsecured loan.
The two products differ in an important way: a home equity loan provides money in a single lump sum, while a HELOC works like a revolving credit line that can be tapped repeatedly. If you are considering whether it is a good time to use your equity, here is a look at average rates nationwide, based on Mortgage Research Center data.
Fortune reviewed the latest MRC figures available as of late October. The quoted rates are national averages for an owner-occupied single-family home with an 80% loan-to-value ratio, a $350,000 loan amount ($850,000 for non-conforming loans), and a 30- to 60-day rate lock. They assume a FICO score of 620 or above.
Your actual rate will vary based on factors such as your credit history, how much equity you have, your debt-to-income ratio, the loan amount and term, and the type of property being used as collateral. If the home is worth less than what you owe, or if the loan is for a second home or investment property, the rate is likely to be higher than the averages shown here.
How home equity loans work
A home equity loan is a secured loan.
As you pay down your mortgage over time and potentially make improvements to the property, you build equity. A home equity loan allows you to borrow against part of that value.
When the loan is issued, the lender sends you a lump sum. You can use it for many purposes, from paying off high-interest credit cards to adding a swimming pool or investing in another property. You then repay the balance through fixed monthly installments, sometimes over as long as 30 years.
How HELOCs work
A home equity line of credit functions in a similar way, letting you borrow against equity in your home. The difference is that instead of receiving one lump sum, you are given a revolving credit line.
It works much like a credit card: you borrow what you need, and the rest remains available on the line. Interest is charged only on the amount you actually draw.
A HELOC usually has two stages:
- The “draw” period – This begins when the loan opens and can last up to 10 years, depending on the lender. During this time, you can typically borrow from and repay the line as often as you want.
- The “repayment” period – Once the draw period ends, you can no longer take new funds from the credit line. You must repay the remaining balance, either all at once or through fixed monthly payments.
Why borrowers use home equity
There are several reasons borrowing against home equity can be attractive.
One major benefit is cost. Because these loans are secured, they often carry lower rates than unsecured personal loans. That can mean substantial interest savings if you use your home’s value instead of a personal loan.
Another advantage is borrowing power. Personal loans are often capped at $100,000 or less, but a home equity loan or HELOC may allow you to access far more, depending on how much equity you have built.
What risks come with borrowing against equity?
Despite the benefits, tapping home equity is not always the safest choice. It can be one of the riskiest forms of borrowing because failing to repay can put your home at risk.
When you use your home as collateral, the lender can foreclose if you fall too far behind. That means you could lose your house, and in some cases still owe money if the sale does not fully cover the balance. Your credit would also take a major hit, making it harder to qualify for another mortgage in the near future.
There are also upfront costs. Opening a home equity loan or HELOC may involve fees for application processing, credit checks, appraisals, and paperwork. Closing costs often range from 2% to 5% of the loan amount.
The bottom line
If you want an affordable loan and plan to use it for something that could raise your net worth or reduce expensive debt, home equity borrowing can make sense. Keeping an eye on home equity loan and HELOC rates can help you decide when it is a favorable time to apply.
Still, the consequences of falling behind can be severe. You could lose your home, and you may even owe money after foreclosure if the property sells for less than the remaining balance.
With a realistic repayment plan and a clear understanding of the risks, a home equity loan or HELOC can be a useful financial tool.
Frequently asked questions
How soon can I use my home equity?
You can usually access home equity once you have built at least 15% to 20% equity, depending on the lender. Most banks want you to keep at least that much equity in the home.
How do you qualify for a home equity loan or HELOC?
To qualify, you generally need a strong credit score, a manageable debt-to-income ratio, and steady income. You also need to have built more than 15% to 20% equity.
How do I calculate my home equity?
To estimate your equity, subtract the amount you still owe on your mortgage from your home’s current estimated value. For example, if your home is worth $350,000 and you still owe $200,000, you have $150,000 in equity.
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