The Best Home Equity Loan Lenders of September 2022

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If you’re a homeowner, your house may be worth more right now than ever. 

Thanks to a highly competitive housing market that’s not expected to change anytime soon, home values are reaching their highest levels in recent history. Between May 2019 and May 2022, home prices went up by 37.8%, according to data from the National Association of Realtors. When home prices increase, homeowners automatically gain more equity, calculated as the difference between their home’s appraised value and their current mortgage balance. 

Home equity loans and home equity lines of credit (HELOCs) let current homeowners take advantage of the equity in their home. Owners can borrow against that equity to fund home improvements, start a business, consolidate high-interest debt, or for almost any other purpose

Home equity loan companies and home equity loan banks can provide this funding, but you’ll need to do your due diligence to find the company that works best for your specific borrowing needs. 

Here are NextAdvisor’s picks for the best home equity loan lenders of July 2022.  

Editorial Independence

As with all of our home equity loan and home equity line of credit (HELOC) lender reviews, our analysis is not influenced by any partnerships or advertising relationships. For more information about our scoring methodology, click here.

Best Home Equity Loan Lenders of July 2022

LENDERREGIONAL OR NATIONAL*LOAN AMOUNT RANGELOAN TERMSMAXIMUM LTV
U.S. BankNational$15,000 – $750,000 (up to $1 million for properties in California)Up to 30 years80%
TD BankRegional$10,000 and up5, 10, 15, 20, or 30 years89.99%
Connexus Credit UnionNational$5,000 – $200,0005 to 15 years90%
KeyBankNational$25,000 and up5 to 30 years80% for standard home equity loans, 90% for high-value home equity loans
Spring EQNational$5,000 – $500,0005 to 30 years90%
Third Federal Savings & LoanRegional$10,000 – $200,0005 to 30 years80%
Frost BankRegional$2,000 and up7 to 20 years for second lien, 10 to 20 years for first lien80%
Regions BankRegional$10,000 – $250,0007,10, 15, or 20 years80%
Discover (honorable mention)National$35,000 – $300,00010, 15, 20 and 30 yearsNot specified
BMO Harris Bank (honorable mention)National$5,000 and up5 to 20 years89.99%
*We defined national lenders as lenders who offer home equity loans in more than half (25) of U.S. states and regional lenders as lenders who offer home equity loans in less than half (25) of U.S. states. 
Good for wide nationwide availability
U.S. Bank
U.S. Bank
Editor’s Score: (4.4/5)
Good for wide nationwide availability
U.S. Bank
Editor’s Score: (4.4/5)
  • Products offered:
    Home equity loan, HELOC, rate-lock HELOC
  • Home equity loan terms:
    Up to 30 years
  • HELOC terms:
    10-year draw period, unspecified repayment period
  • Maximum LTV allowed:
    80%

NextAdvisor’s Take

Pros
  • Rate discount for setting up autopay from a U.S. Bank checking or savings account (home equity loans only)
  • Extensive availability nationwide (47 states for both home equity loans and HELOCs)
  • Can apply online, over the phone, or in person at a branch
  • Good price transparency
  • Many customer support options
Cons
  • There may be an annual fee for HELOCs if you don’t have a U.S. Bank Platinum Checking Package
  • Not available in TX, DE, SC
  • Potential early closure fee if you close your HELOC within 30 months of opening
The Bottom Line

Based in Minneapolis, Minnesota, U.S. Bank is the fifth largest banking institution in the U.S. It offers both home equity loans and HELOCs in 47 states, with the option of interest-only HELOCs  available to qualified borrowers. You also have the option to lock all or part of your outstanding HELOC balance into a fix-rate option during your draw period. Available loan amounts for HELOCs and home equity loans range from $15,000 to $750,000, and up to $1 million for properties in California.

There are no closing costs on home equity loans or HELOCs from U.S. Bank, but you’ll be charged an early closure fee of 1% of the line amount ($500 max) if you close your HELOC within 30 months of opening. In addition, HELOC borrowers may be charged an annual fee of up to $90, which can be waived with a U.S. Bank Platinum Checking Package. U.S. Bank offers a rate discount of 0.5% for home equity loan borrowers who set up automatic payments from a U.S. Bank personal checking or savings account.

You can apply for a home equity loan or HELOC through an online application, by phone, or by visiting a U.S. Bank branch in person. If you want a loan estimate for a home equity loan — which includes the estimated interest rate, monthly payment, and total closing costs — without completing a full application, you can get one by speaking with a banker over the phone. 

We like U.S. Bank because of its extensive nationwide availability, many customer support options, and excellent price transparency — meaning you can get a personalized rate quote and fee information just by filling out some basic information, no credit check required. 

Good for price transparency
TD Bank
TD Bank
Editor’s Score: (4.1/5)
Good for price transparency
TD Bank
Editor’s Score: (4.1/5)
  • Products offered:
    Home equity loan, HELOC, interest-only HELOC, rate-lock HELOC
  • Home equity loan terms:
    5, 10, 15, 20, or 30 years
  • HELOC loan terms:
    10-year draw period, 20-year repayment period
  • Maximum LTV:
    89.99%

NextAdvisor’s Take

Pros
  • Options to apply in person, on the phone, or online
  • 0.25% rate discount if you set up auto-pay from a TD account
  • No credit check required to see personalized rates and fees
  • Many products and options available
Cons
  • Only offered in 15 states
  • $99 origination fee for both home equity loans and HELOCs
The Bottom Line

Primarily operating on the East Coast,  TD Bank is one of the 10 largest banks in the U.S. and serves more than 9.7 million customers. TD Bank offers Home Equity Loans and HELOCs in 15 states, with the option for interest-only and rate-lock HELOCs. Loan amounts for home equity loans start at $10,000, while line amounts for HELOCs start at $25,000.

For a home equity loan or HELOC with TD Bank, closing costs only exist on loan amounts greater than $500,000, but you will be required to pay a $99 origination fee at closing regardless of your loan amount. There is also an annual fee of $50 on HELOCs unless your loan amount is less than $50,000. You’ll be charged an early termination fee of 2% of the outstanding balance if your HELOC is closed within 24 months from opening. Additionally, you’ll receive a 0.25% rate discount if you set up auto-pay from a TD personal checking or savings account. 

If you decide to apply for a TD Bank home equity loan or HELOC, you can do so online, by phone, or by visiting a TD Bank in person. The online application includes a calculator that will tell you the maximum amount you can borrow based on the information you input, but you can also see a full breakdown of rates, fees, and monthly payments by entering some basic information online. No credit check is required for this service. 

Though its nationwide availability is limited, we like TD Bank because it has a wide variety of product offerings — including interest-only and rate-lock options on its HELOCs. The bank’s good online user experience and price transparency make it easy to work with this lender,  and the customer service is very accessible.

Good for wide range of customer service options
Connexus Credit Union
Connexus Credit Union
Editor’s Score: (4/5)
Good for wide range of customer service options
Connexus Credit Union
Editor’s Score: (4/5)
  • Products offered:
    Home equity loan, HELOC, interest-only HELOC
  • Home equity loan terms:
    5 to 15 years
  • HELOC terms:
    15-year draw period, 15-year repayment period
  • Maximum LTV:
    90% for home equity loans

NextAdvisor’s Take

Pros
  • No annual fee
  • Available in 46 states
  • Excellent customer service options
  • Membership requirements are relatively easy to meet
Cons
  • Credit check required to get a personalized rate quote and product terms
  • Not available in Alaska, Hawaii, Maryland, and Texas
  • Potential for high closing costs
  • Must be a member of the credit union to get a loan
The Bottom Line

With over 420,000 members in all 50 states, Connexus Credit Union has a far reach in the United States. The credit union offers home equity loans and HELOCs in 46 states (excluding Alaska, Hawaii, Maryland, and Texas). Loan amounts for home equity loans and HELOCs range from $5,000 to $200,000. Within its HELOC product offerings is an interest-only HELOC which may allow you to pay a lower monthly payment. Since Connexus is a credit union, its products are only available to members. But, membership eligibility is open to most people: you (or a family member) just need to be a member of one of Connexus’s partner groups, reside in one of the communities or counties on Connexus’s list, or become a member of the Connexus Association with a $5 donation to Connexus’s partner nonprofit. 

Connexus does not specify any rate discounts, but it does offer an introductory rate for the first six months of your loan term. You won’t have to pay an annual fee for a home equity loan or HELOC with Connexus, but closing costs can range from $175 to $2,000 depending on your loan terms and property location. 

To apply for a home equity loan or HELOC with Connexus, you can fill out a 3-step application online. Though the application process is quick, you won’t be able to see a personalized rate or product terms without a credit check.

Connexus offers expansive nationwide availability and has several product offerings, part of the reason this lender ranked highly for us. Its straightforward application process is another bonus that makes applying for a home equity loan or HELOC easy.

Good for wide range of product offerings
KeyBank
KeyBank
Editor’s Score: (4/5)
Good for wide range of product offerings
KeyBank
Editor’s Score: (4/5)
  • Products offered:
    Home equity loan, HELOC, interest-only HELOC, rate-lock HELOC
  • Home equity loan terms:
    5 to 30 years
  • HELOC terms:
    15-year draw period, 15-year repayment period
  • Maximum LTV:
    80% for standard home equity loans and HELOCs, 90% for high-value home equity loans and HELOCs

NextAdvisor’s Take

Pros
  • Interest-only and rate-lock HELOC options
  • Streamlined application process for existing KeyBank customers
  • Smooth online user experience and website
Cons
  • High closing costs if you plan to use a closing agent
  • Annual fee for HELOCs
  • Origination fee for home equity loans
The Bottom Line

Based in Cleveland, Ohio, KeyBank has been around for nearly 190 years. KeyBank offers home equity loans to customers in 15 states and HELOCs to customers in 44 states. Aside from a standard HELOC, KeyBank also offers interest-only and rate-lock options. Home equity loan amounts of $25,000 and up are available, while HELOCs have line amounts of $10,000 and up. 

KeyBank HELOCs come with an annual fee of $50, but no closing costs unless your closing is performed by a closing agent. In that case, your closing fee could be up to $400. KeyBank offers a 0.25% rate discount for clients who have eligible checking and savings accounts with KeyBank. Additionally, home equity loans have an origination fee of $295.

The KeyBank application allows you to apply for multiple products at one time. If you’re not sure whether KeyBank loans are available in your area, the application will tell you once you input your zip code. If you’re an existing KeyBank customer, you’ll have the option to skim through the application and import your personal information from your account. 

We like KeyBank because of its extensive product offerings. The streamlined application process for existing customers is helpful, but both existing and new customers will likely be pleased with the online user experience and availability of customer service that KeyBank offers.

Good for online application user experience
Spring EQ
Spring EQ
Editor’s Score: (4/5)
Good for online application user experience
Spring EQ
Editor’s Score: (4/5)
  • Products offered:
    Home equity loan, HELOC, interest-only HELOC
  • Home equity loan terms:
    5 to 30 years
  • HELOC terms:
    10-year draw period, 20-year repayment period
  • Maximum LTV:
    90% for home equity loans, 97.5% for HELOCs

NextAdvisor’s Take

Pros
  • No credit check required to see personalized rates
  • Available in 38 states
Cons
  • Origination fee of $995
  • Minimum credit score of 620 required
  • No specified rate discounts
The Bottom Line

Spring EQ may be a relatively new bank founded in 2016, but it has already earned a positive reputation from customers across the 38 states it serves. Spring EQ offers home equity loans, HELOCs, and interest-only HELOCs, providing borrowers with flexible loan options. Home equity loan amounts range from $5,000 to $500,000, while HELOC line amounts range from $50,000 to $500,000.

Spring EQ loans may be subject to an origination fee of $995 and an annual fee of $99 in some states. Spring EQ does not specify any rate discounts.

The Spring EQ loan application process is transparent and easy to understand. Customers can see an extensive breakdown of their loan term and rate options without needing to undergo a credit check or provide their social security number. To be eligible for a home equity loan or HELOC with Spring EQ, you’ll need a credit score of 620 or higher, along with a debt-to-income ratio of 45% or less.

We ranked Spring EQ highly because of the lender’s price transparency, which allows potential borrowers to get pre-qualified for a loan with only basic information. This makes it easy to compare rates without needing to provide sensitive personal information or undergo a hard credit check. Additionally, the online experience is user-friendly and the application’s breakdown of rates, fees, and terms is easily digestible for customers.

Good for rate match guarantee
Third Federal Savings & Loan
Third Federal Savings & Loan
Editor’s Score: (3.9/5)
Good for rate match guarantee
Third Federal Savings & Loan
Editor’s Score: (3.9/5)
  • Products offered:
    Home equity loan, 5/1 home equity loan, HELOC
  • Home equity loan terms:
    5 year, 10 year, 5/1 adjustable rate (6-30 years)
  • HELOC terms:
    10-year draw period, 20-year repayment period
  • Maximum LTV:
    80%

NextAdvisor’s Take

Pros
  • No application, closing, or origination fees
  • Lowest rate guarantee
  • Smooth online application process
Cons
  • Limited geographic availability for home equity loans
  • $65 annual fee on HELOCs (waived the first year)
The Bottom Line

Opened in the midst of the Great Depression in 1938, Third Federal Savings & Loan sought to help unemployed and underemployed Ohio residents achieve home ownership. Since its opening, Third Federal has expanded significantly, now offering HELOCs in 26 states and home equity loans in eight states. Home equity loans and HELOCs are available in amounts from $10,000 to $200,000.

Home equity loans and HELOCs with Third Federal come with an annual fee of $65 (waived the first year) but no application fees, closing fees, or origination fees. If you set up autopay from an existing Third Federal account before closing, you’ll be eligible for a 0.25% rate discount. Additionally, Third Federal offers a lowest rate guarantee on its HELOCs and home equity loans, meaning Third Federal will offer you the lowest interest rate relative to other similar lenders or pay you $1,000.

You can apply for a home equity loan or HELOC on the Third Federal website. Both applications are included on the same page along with multiple rate and term options, allowing the customer to assess what will be best for them. Third Federal also provides helpful tools and tips on its application page to answer questions that borrowers may have. You won’t have to register an account to apply, but you’ll still be able to save your application and return to it later.

We like Third Federal’s application process and the lender’s price transparency. If you’re not sure what kind of home equity product you’re looking for, the website provides useful information to help you decide. Third Federal also offers a unique product not commonly found among other lenders: a 5/1 adjustable-rate home equity loan, where the rate is fixed for the first five year and then adjusts annually, much like how an adjustable-rate mortgage works. However, you won’t be eligible for this product unless you live in one of the eight states in which Third Federal offers home equity loans.

Good for Texas borrowers
Frost Bank
Frost Bank
Editor’s Score: (3.7/5)
Good for Texas borrowers
Frost Bank
Editor’s Score: (3.7/5)
  • Products offered:
    Home equity loan, HELOC, interest-only HELOC
  • Home equity loan terms:
    7 to 20 years for a second lien, 10 to 20 years for a first lien
  • HELOC terms:
    10-year draw period, 20-year repayment period
  • Maximum LTV:
    80%

NextAdvisor’s Take

Pros
  • No application fee or annual fee
  • Benefits for new and existing Frost Bank customers
  • Quick, 15-minute application process
Cons
  • Only available in Texas
  • Have to create an account to apply
The Bottom Line

Headquartered in San Antonio, Texas, Frost Bank’s products are only available to Texas residents. Among the products offered are home equity loans, HELOCs, and interest-only HELOCs. If you’re not sure which one of these products is best for you, the Frost Bank website provides a loan product selection tool to help you consider your options. Home equity loans come with loan amounts of $2,000 and up, while HELOCs come with line amounts of $8,000 and up. 

Frost Bank does not require an application fee or an annual fee. Additionally, there are no closing costs for the borrower. If you have automatic payments set up from a Frost Bank checking or savings account, you’ll be eligible for a 0.25% rate discount. 

You can apply for a home equity loan or HELOC on the Frost Bank website, but first you’ll need to create an account. According to the website, the application will only take you about 15 minutes. If you’re not located in Texas, you won’t be able to apply. 

Though Frost Bank’s nationwide availability is very limited, the bank has a helpful product selection tool, easy application process, and good price transparency. Frost Bank’s customer service is very accessible – another reason for its high rating.

Good for rate discounts
Regions Bank
Regions Bank
Editor’s Score: (3.5/5)
Good for rate discounts
Regions Bank
Editor’s Score: (3.5/5)
  • Products offered:
    Home equity loan, HELOC, rate-lock HELOC
  • Home equity loan terms:
    7,10, 15, or 20 years
  • HELOC terms:
    10-year draw period, 20-year repayment period
  • Maximum LTV:
    80%

NextAdvisor’s Take

Pros
  • No closing costs for home equity loans
  • Options to apply online, in-person, or over the phone
  • Accessible customer service options
Cons
  • Closing costs for HELOCs
  • Limited nationwide availability (15 states)
The Bottom Line

As one of the nation’s largest banking, mortgage, and wealth management service providers, Regions Bank serves customers across the South, Midwest, and Texas.  Regions offers home equity loans and HELOCs in 15 states. Its HELOC offerings also come with a rate-lock option for customers who want it. Home equity loans have loan amounts of $10,000 to $250,000 and HELOCs have line amounts ranging from $10,000 to $500,000.

For home equity loans and HELOCs, Regions offers rate discounts between 0.25% and 0.5% to those who elect to have their monthly payments automatically debited from a Regions checking account. For home equity loans, there are no closing costs. HELOCs, however, can have closing costs between $150 and $2,000, but Regions will pay these costs if the HELOC amount is $250,000 or less. 

You can apply for a Regions home equity loan or HELOC online, in-person, or over the phone. You’ll have to create an account with Regions to apply. Before you create an account, though, you can use the bank’s own rate calculator to estimate your rate and monthly payment amount. 

We like Regions because of the variety of application options it offers and the ease of applying online. Regions provides several ways to contact customer service, ensuring that customers can get questions answered quickly. Though Regions only offers its products in 15 states, it gives customers in these states the flexibility to choose between home equity loans, HELOCs, and rate-lock HELOCs.

Honorable mentions

Good for no fees or closing costs
Discover
Discover
Editor’s Score: (2.9/5)
Good for no fees or closing costs
Discover
Editor’s Score: (2.9/5)
  • Products offered:
    Home equity loan
  • Home equity loan terms:
    10, 15, 20 or 30 years
  • HELOC terms:
    N/A
  • Maximum LTV:
    Not specified

NextAdvisor’s Take

Pros
  • No origination fees or closing costs
  • Home equity loans are available in 48 states
Cons
  • Limited customer service options available
  • Home equity loans not available in Iowa and Maryland
  • Does not offer HELOCs
The Bottom Line

A financial services company known primarily for its credit cards, Discover also offers home equity loans as part of its suite of banking products. Home equity loans are available in 48 states, but the lender does not offer home equity lines of credit (HELOCs) at all. For Discover’s home equity loans, possible loan amounts range from $35,000 to $300,000. The lender charges no origination fees, application fees, appraisal fees, and mortgage taxes. 

You can apply for a home equity loan from Discover online or over the phone. The application process takes approximately six to eight weeks in total, according to Discover’s website. 

Discover offers wide nationwide availability for its home equity loans and good price transparency, but its lack of HELOC offerings may be a limiting factor for consumers looking for additional product options. In addition, Discover offers limited customer service options — your only option to get help is by phone, with no in-person service or online options like email or live chat. 

Good for high loan-to-value ratio options
BMO Harris Bank
BMO Harris Bank
Editor’s Score: (3.4/5)
Good for high loan-to-value ratio options
BMO Harris Bank
Editor’s Score: (3.4/5)
  • Products offered:
    Home equity loan, HELOC, interest-only HELOC, rate-lock HELOC
  • Home equity loan terms:
    5 to 20 years
  • HELOC terms:
    10-year draw period, 20-year repayment period
  • Maximum LTV:
    85% for HELOCs; 89.99% for most home equity loans

NextAdvisor’s Take

Pros
  • Available in 48 states
  • No hard credit check required
  • Flexible product offerings
  • Option for 100% CLTV for borrowers who meet certain qualifications
Cons
  • Limited customer service options
  • Can only receive personalized rates on the phone
  • $75 annual fee for HELOCs
The Bottom Line

As the 8th largest bank by assets in North America, BMO Harris Bank (a subsidiary of the Canadian financial services company Bank of Montreal) serves more than 12 million customers globally.  Currently, BMO Harris products and services are available in 48 states (all but New York and Texas). BMO Harris offers home equity loans and three variations of a HELOC. Loan amounts for home equity loans start at $5,000 and up while HELOC lines start at $10,000 and up. 

The normal maximum combined loan-to-value ratio allowed is 85% for HELOCs and 89.99% for home equity loans, but a 100% max CLTV option is available for low-to-moderate income borrowers or Low to Moderate Income Census Tract customers who need to make home improvements.

There is no application fee for a home equity loan or line of credit with BMO Harris. In addition, BMO Harris will pay closing costs for loans secured by an owner-occupied 1 to 4-family residence, but borrowers will have to pay a $75 annual fee for a HELOC. If you authorize auto pay from a BMO Harris checking account, you’ll be eligible to receive a 0.50% rate discount.

You can apply for a home equity loan or HELOC online or in-person, but in order to get personalized rates, you’ll have to speak with a representative on the phone. Getting personalized rates does not require a hard credit check. 

We like that BMO Harris offers both home equity loans and three types of HELOCs almost nationwide, but the lender fell short because of its low price transparency. Additionally, the online application requires your social security number and has some elements that could be confusing for customers. 

How We Chose the Best Home Equity Loan Lenders

Our Methodology

NextAdvisor developed a framework to evaluate home equity lenders using a weighted average score between 1 and 5 based on the following criteria. A higher weight was given to the criteria we determined to be most important:

  1. Nationwide availability: We rated lenders on a scale of 1 to 5 based on how many states their home equity products were offered in. For lenders that only offered either home equity loans or HELOCs, we looked at how many states offered that specific product. For lenders that offered both home equity loans and HELOCs, we looked at how many states each individual product was offered in, and then took the average. A lender scored a 5 if it offered home equity products in at least 45 states which equates to 90% of U.S. states. Nationwide availability counted for 10% of the composite score.
  2. Online user experience: We rated lenders on a scale of 1 to 5 based on the user experience of their online application process. A 5 was given to lenders who had a clear, easy-to-navigate online application process with no technical issues or confusing instructions. A score of 1 was given to lenders who did not offer an online application at all, instead requiring customers to apply in person at a branch or over the phone. Online user experience counted for 20% of the composite score.
  3. Products offered: We rated lenders on a scale of 1 to 5 based on how many types of home equity products they offered. Product offerings were categorized into the following types: home equity loans; standard variable-rate, interest-and-principal HELOCs, interest-only HELOCs, HELOCs with fixed-rate or rate-lock options, and miscellaneous products that did not fall into any of the previous categories. Lenders who offered at least 4 types of products received a 5. Products offered counted for 20% of the composite score.
  4. Price transparency: We rated lenders on a scale of 1 to 5 based on their price transparency, which we defined as how much information you could get about rates and fees without a hard credit check. Comparing rates and fees from multiple lenders is one of the best ways to ensure you’re getting the best deal, and we gave high scores to lenders who made it easy to do so. On the other hand, lenders who kept detailed rate and fee information behind a hard credit check — which can slightly lower your credit score and should only be done when you’re serious about moving forward with a particular lender — scored lower. Lenders who provided personalized quotes for rates, fees, and important loan information with only basic information (and no hard credit check) required received a 5. Price transparency counted for 30% of the composite score.
  5. Customer service options: We rated lenders on a scale of 1 to 5 based on how many different customer service options were available to consumers needing help with their loan application or loan servicing. Examples of customer service options we counted included, but were not limited to, online live chat, phone, email, visiting an in-person branch, in-person or virtual appointments with dedicated loan officers, and social media direct messaging. Lenders who had five or more customer service options received a 5. For each option that was available only to existing customers (and thus would not be available to new customers needing help with the application process), we deducted 0.5 from the score. For any lender that had a 24/7 customer service option, regardless of what form that option took, we added 1 to the score. We did not evaluate the quality of the customer service itself, as that can be subjective and highly dependent on the specific customer service representative a borrower is working with. Customer service options counted for 20% of the composite score. 

If a company offered both home equity loans and HELOCs, we evaluated its home equity lending as a whole rather than any specific product. 

Closing the Gap

There are some notable discrepancies within the housing market that disproportionately affect Hispanic homebuyers. Latinos were 60% more likely to be denied home loans in 2020 compared to non-Latinos, according to a report by the non-profit advocacy group the National Association of Hispanic Real Estate Professionals.

This means securing a loan for a home purchase may be particularly difficult for Hispanic borrowers. Lenders will consider whether you are an eligible borrower, but you can turn the tables and evaluate if they are the best lender for you. The best way to gain leverage is by shopping around and comparing rates and fees with multiple lenders to be sure you’re getting the best deal and a fair offer. 

Which Type of Home Equity Financing is Right for You?

When you buy a home with a mortgage, you build equity with each payment you make. As you pay down the principal on your home loan, you gain more ownership of the home, allowing you increased borrowing access to the most valuable asset you own. 

However, home equity lending requires you to use your home as collateral. This means if you cannot make your loan payments, your lender could seize your home. Other types of loans, like personal loans and student loans, don’t necessarily come with this type of commitment. Before you borrow against your home equity, make sure that the expense is worth taking on debt for and that you have a plan to pay the loan back. 

There are three main types of home equity financing: home equity loans, home equity lines of credit (HELOCs), and cash-out refinancing. The three methods work slightly differently, but they all allow you to tap into the value of your home equity to borrow cash upfront. The type of loan best for you depends on your situation and goals, says Rebecca Neale, an attorney with Bedford Family Lawyer in Massachusetts.

Home equity loan

A home equity loan offers you a lump sum of cash, with the maximum amount you can borrow determined by how much home equity you have. Most lenders cap your maximum combined loan-to-value ratio at 85%, meaning the sum of your loan amount and the remaining amount on your mortgage can’t exceed 85% of your home’s value. 

Home equity loans typically have a fixed interest rate, according to Casey Fleming, a mortgage advisor in the Silicon Valley area and author of “The Loan Guide.” You’ll receive your loan funds in a lump sum and can then use the money for whatever you wish. You’ll repay the loan over a set period of time, usually ranging from five to 30 years.

Home equity loans and HELOCs are considered second mortgages, meaning they don’t alter or replace your primary mortgage like a cash-out refinance does. This makes them a good choice when mortgage rates are high and homeowners don’t want to give up the low rate on their primary mortgage just to access their home equity. 

A home equity loan is best for borrowers who have fixed costs and a defined goal for their money. If you know you’ll need a certain amount to pay for a major expense like a home improvement project, a home equity loan could be a good choice. Neale points out that some of her clients like using home equity financing because there’s a potential for a tax deduction on the interest paid — but only if the money is used for home improvements.

Pros

  • Fixed interest rate and fixed monthly payments provide greater stability

  • Long loan terms mean the monthly payments can be relatively low

  • Lower interest rates compared to a credit card or personal loan

  • Interest might be tax-deductible if used on qualified home improvement costs

Cons

  • If you need more money, you’ll need to apply for another loan (not revolving credit like a HELOC)

  • Your home is at risk if you miss payments

  • Rates can be higher than with a HELOC

Home equity line of credit (HELOC)

With a home equity line of credit, or HELOC, you get access to a revolving line of credit, similar to a credit card — except secured by your home. Unlike a home equity loan, which is paid in a one-time lump sum, a HELOC lets you access ongoing cash (up to the credit line) without needing to reapply for funds. HELOCs typically charge a variable interest rate that fluctuates based on the prime rate, but some lenders may offer a low introductory rate for a set amount of time. 

In general, Fleming says, a HELOC comes with two phases: a draw period and a repayment period, the lengths of which are specified in the loan agreement. During the draw period, you can borrow as much as you want, whenever you want, up to the credit limit set by the lender. Depending on the exact terms of your HELOC, your minimum monthly payment may only consist of accrued interest, not principal — though you always have the option of paying more than the minimum during the draw period to start chipping away at the loan principal. After the draw period ends and the repayment period begins, you’ll make payments covering both the interest and the principal. 

Some HELOCs can come with an annual fee to keep the line open, and lenders may charge a penalty if you pay off and close your HELOC early. Be sure to check with your lender about the specific fees and policies of your HELOC. 

A HELOC can work well for someone who isn’t sure how much a project will cost, or who needs access to an ongoing, low-rate source of cash over a period of months or years.

However, Fleming has a warning for those using a HELOC. “It’s easy to get comfortable during the draw period, never paying toward the principal. Once that period ends, though, you typically have less than 15 years to repay the loan and it can be hard to do,” he says. “The other trap is that it’s easy to end up in a cycle of endless financing.”

Pros

  • More flexible access to money without the need to reapply for funds

  • Only pay interest on the amount you use

  • Potential interest tax deduction when funds are used for qualified home improvements

  • Some lenders may offer a lower, introductory rate

Cons

  • You could lose your home if you miss payments

  • Variable rates could rise over time

  • You could end up in an endless repayment cycle

Cash-out refinance

Unlike a home equity loan or HELOC, a cash-out refinance replaces your existing mortgage with a new one that’s worth more than what you currently owe. You then receive the difference as a cash payment. For example, let’s say you owe $150,000 on your mortgage and your home is worth $300,000, meaning you have $150,000 (or 50%) in equity. You could potentially refinance your mortgage with a new home loan for $225,000. You’d use the new $225,000 mortgage to pay off the remaining $150,000 balance of your current mortgage, and keep the $75,000 left over as cash. You can then use the money for whatever you wish. 

A cash-out refinance can work well for someone who wants to get upfront cash while changing their mortgage terms. 

If the current refinance rates are lower than your original mortgage rate, a cash-out refinance could save you money in the long run. On top of that, you may be able to improve your cash flow with a lower monthly payment. However, given that mortgage rates have risen sharply this year and are now hovering around 5% to 6%, cash-out refinancing is a less viable option now for many homeowners who already refinanced to low rates during 2020 and 2021. 

Neale points out another use for a cash-out refinance: working things out during a divorce. “A cash-out refinance is a good way to use your home’s equity to buy out your spouse’s interest in a divorce because it gets you cash for the buyout and gets your spouse’s name off the mortgage,” she says.

Pros

  • In a low mortgage rate environment, rates can be lower than with a home equity loan or HELOC

  • Potentially improve your cash flow if you can get an interest rate lower than your current mortgage rate

  • Only one loan and one monthly payment to manage

Cons

  • Depending on the terms, you could be in debt longer since your loan term resets (unless you’re refinancing to a shorter loan term)

  • Potential to lose your home if you can’t make the new payments

  • You might have to pay private mortgage insurance if your cash-out refinance puts your loan-to-value above 80%

  • Typically comes with substantial closing costs

What Is the Average Interest Rate for Home Equity Loans?

The overall average interest rate for home equity loans is 6.81%, according to Bankrate. The average rate for a 10-year home equity loan is 6.88% and the average rate for a 15-year loan is 6.90%. 

These average rates are accurate as of July 28, 2022.

Overall average home equity loan rateAverage 10-year home equity loan rateAverage 15-year home equity loan rate
6.81%6.88%6.90%

Interest rates across the board have been on the rise as the Federal Reserve hiked the federal funds rate multiple times since the beginning of the year in an effort to curb runaway inflation. Home equity loan rates are no exception. 

Although home equity loan rates have risen in the past year, they still tend to be lower than interest rates on personal loans or credit cards. 

How to Shop Around and Get a Home Equity Loan

Taking out a home equity loan is an involved process, so make sure you work with a lender that makes the process as smooth as possible. It pays to get quotes from multiple home equity lenders to ensure you’re getting the best deal. Look into online lenders, credit unions, and big-name banks. 

Before diving into the quote process and comparing the best home equity loans, get a sense of what your loan may look like with our home equity loan calculator. Simply enter how much you’re looking to borrow, how long you want your loan to last, your expected interest rate, and your credit score. You’ll immediately see what your monthly payment could be. Generally, competitive home equity loan rates hover between 3% to 8%. However, your exact interest rate will depend on multiple factors, including your credit score, debt-to-income ratio, loan-to-value ratio, and loan amount. The lowest rates are generally reserved for borrowers with a good credit score and clean credit history. You’ll need to fill out an application or prequalification form from each lender to get personalized rate quotes.

When comparing home equity loans, you’ll not only want to consider the interest rates you’ll get, but also any other fees or closing costs a lender charges. Some of these closing costs include an origination fee, title fee, or appraisal fee. Always check the fine print of the offer you receive, which should outline any upfront expenses you’ll incur by taking out the loan. Additionally, that fine print will likely outline any fee waiver options. 

Some consumers also look for other factors when choosing a lender. Consider how convenient the application process is, if there are any local branches available to you, and the lender’s customer support options. Additionally, ask if there are any discounts, like a discount for setting up automatic payments. If you’re a good credit borrower, you’ll likely see similar borrowing options among lenders and competitive interest rates, so factors like these can push one lender to the top of your list. 

Frequently Asked Questions (FAQ)

Is it a good idea to borrow from home equity?

Borrowing from home equity — whether through a home equity loan, HELOC, or cash-out refinance — can be a good way to access large amounts of cash at relatively low interest rates compared to credit cards and personal loans. But, it’s not without risks. Since your house acts as collateral for the loan, you could lose your home if you fall behind on payments. Because of this, it’s important to only borrow what you can afford to pay off and never take on debt for nonessential expenses like a vacation, wedding, or luxury purchase.

How much can you borrow with a home equity loan?

How much you can borrow with a home equity loan mainly depends on how much equity you have in your house. Exact requirements vary by lender, but most home equity loan lenders limit your loan-to-value ratio to 85% or under. This means that the total value of the home equity loan you’re seeking plus the outstanding loan balance on your primary mortgage can’t exceed 85% of your home’s appraised value.

For example, if you have a house worth $300,000 and a $100,000 mortgage balance, the maximum amount you can borrow with a home equity loan would be $155,000 (assuming a maximum LTV of 85%).

What credit score do you need to get a home equity loan?

When deciding whether to grant you a home equity loan, lenders look at multiple factors: your credit score and credit report, your debt-to-income ratio, your monthly income, and how much equity you have in your home, among other things. Each lender also has its own unique underwriting requirements. But in general, you’ll want a credit score of at least 680 to have the best chance of getting a home equity loan, according to the credit bureau Experian. Keep in mind that your creditworthiness can also affect the interest rate you get. The lowest advertised rates are usually reserved for the most creditworthy borrowers.