A home equity loan is a one-time installment that allows homeowners to borrow against their property’s value at a fixed rate.
If you have at least 15% to 20% equity in your home, you can use this type of loan to fund renovation projects or any big expense. But before securing a home equity loan, consider what you’re going to do with the funds as well as how you plan to pay it back.
Home equity loan rates are inching closer to 9% right now. While that interest rate is still lower than the rates on some personal loans and credit cards, home equity loans also come with a major risk: If you miss multiple payments, you could lose your home.
Here’s what you need to know about how home equity loans work and where to find the best rates.
This week’s home equity loan rates
Here are the average rates for home equity loans and home equity lines of credit, as of Sept. 27, 2023.
|Loan type||This week’s rate||Last week’s rate||Difference|
|10-year, $30,000 home equity loan||8.78%||8.75%||+0.03|
|15-year, $30,000 home equity loan||8.77%||8.73%||+0.04|
Current home equity loan rates and trends
Rates on home equity loans move alongside the federal funds rate. In March 2022, the Federal Reserve kicked off a string of aggressive rate hikes to combat surging inflation. This has led to the elevated rates on home equity loans we see today.
But with inflation gradually coming down from record highs, the Fed decided to skip another rate hike during its September meeting.
While the Fed is in this holding pattern, the rates on home equity loans might plateau, but they aren’t likely to fall anytime soon.
Home equity loans are commonly used for home improvement projects, such as adding solar panels or renovating a kitchen, that will increase the home’s value. Despite higher rates, homeowners still have some incentive to take out a home equity loan for those kinds of projects, according to Ran Eliasaf, founder and managing partner at Northwind Group, a real estate private equity firm.
Top home equity loan rates of September 2023
|Lender||APR||Loan amount||Loan terms||Max LTV ratio|
|U.S. Bank||From 8%||Not specified||Up to 30 years||Not specified|
|TD Bank||7.29% (0.25% autopay discount included)||From $10,000||5 to 30 years||Not specified|
|Connexus Credit Union||From 9.74%||From $5,000||5 to 15 years||90%|
|KeyBank||From 11.54% (0.25% autopay discount included)||From $25,000||1 to 30 years||80% for standard home equity loans, 90% for high-value home equity loans|
|Spring EQ||Fill out application for personalized rates||Up to $500,000||Not specified||90%|
|Third Federal Savings & Loan||From 6.99%||$10,000 to $200,000||Up to 30 years||80%|
|Frost Bank||From 7.28.85% (0.25% autopay discount included)||$2,000 to $500,000||15 to 20 years||90%|
|Regions Bank||From 6.25% (0.25% autopay discount included)||$10,000 to $250,000||7, 10, 15, 20 or 30 years||89%|
|Discover||6.24% for 1st liens, 7.49% for 2nd liens||$35,000 to $300,000||10, 15, 20 or 30 years||90%|
|BMO Harris||From 8.74% (0.5% autopay discount not included)||From $25,000||5 to 20 years||Not specified|
Note: The above annual percentage rates are current as of Sept. 1, 2023. Your APR will depend on such factors as your credit score, income, loan term, and whether you enroll in autopay or other lender specific requirements.
Best home equity loan lenders of September 2023
What is a home equity loan?
A home equity loan is a fixed-rate installment loan secured by your home. You’ll get a lump sum payment upfront and then repay the loan in equal monthly payments over a period of time. Because your house is used as collateral, the lender can seize it if you default on your payments.
Most lenders require you to have 15% to 20% equity in your home in order to secure a home equity loan. To determine how much equity you have, subtract your remaining mortgage balance from the value of your home. For example, if you have a $500,000 mortgage and you owe $350,000 on it, you have $150,000 in equity -- 30% available equity. Lenders will typically let you borrow around 80% to 85% of your home’s equity. In this example, you can borrow roughly $120,000 to $127,500.
A standard repayment period for a home equity loan is between five and 30 years. Under the loan, you make fixed-rate payments that never change. If interest rates go up, your loan rate remains locked.
Second mortgages such as home equity loans and HELOCs don’t alter a homeowner’s primary mortgage. This lets you borrow against your home’s equity without needing to exchange your primary mortgage’s rate for a new, higher one.
Home equity loans have fixed interest rates, which is a positive if you’re looking for predictable monthly payments. The rate you lock in when you take out your loan will be constant for the entire term, even if market interest rates rise.
A home equity loan is a good choice if you need a large sum of cash all at once. You can use that cash for anything you’d like. However, some of the most common uses include home improvement like adding solar panels, college tuition and debt consolidation.
Avoid using a home equity loan for discretionary expenses like a vacation or wedding. It may not be worth the risk of losing your home.
Little to no restrictions on what you can use the money for.
May be hard to qualify for if you don’t have enough equity.
Home equity loan vs. HELOC
Home equity loans and HELOCs are similar but have a few key distinctions. Both let you draw on your home’s equity and require you to use your home as collateral to secure your loan. The two major differences are the way you receive the money and how you pay it back.
A home equity loan gives you the money all at once as a lump sum, whereas a HELOC lets you take money out in installments over a long period of time, typically 10 years. Home equity loans have fixed-rate payments that will never go up, but most HELOCs have variable interest rates that rise and fall with the economy and overall interest-rate trends.
A home equity loan is better if:
- You want a fixed-rate payment: Your monthly payment will never change even if interest rates rise.
- You want one lump sum of money: You receive the entire loan upfront with a home equity loan.
- You know the exact amount of money you need: If you know the amount you need and don’t expect it to change, a home equity loan likely makes more sense than a HELOC.
A HELOC is better if:
- You need money over a long period of time: You can take the money as you need it and only pay interest on the amounts you withdraw, not the full loan amount, as is the case with a home equity loan.
- You want a low introductory interest rate: Although HELOC rates may increase over time, they also typically offer lower introductory interest rates than home equity loans. So you could save money on interest charges.
Home equity loans vs. cash-out refinances
A cash-out refinance is when you replace your existing mortgage with a new mortgage, typically to secure a lower interest rate and more favorable terms. Unlike a traditional refinance, though, you take out a new mortgage for the home’s entire value -- not just the amount you owe on your mortgage. You then receive the equity you’ve already paid off in your home as a cash payout.
For example, if your home is worth $450,000, and you owe $250,000 on your loan, you would refinance for the entire $450,000, rather than the amount you owe on your mortgage. Your new cash-out refinance home loan would replace your existing mortgage and then offer you a portion of the equity you built (in this case $200,000) as a cash payout.
Both a cash-out refi and a home equity loan will provide you with a lump sum of cash that you’ll repay in fixed amounts over a specific time period, but they have some important differences. A cash-out refinance replaces your current mortgage payment. When you receive a lump sum of cash from a cash-out refi, it’s added back onto the balance of your new mortgage, usually causing your monthly payment to increase. A home equity loan is different -- it doesn’t replace your existing mortgage and instead adds an additional monthly payment to your expenses.
A home equity loan is better if:
- You don’t want to pay private mortgage insurance: Some cash-out refinances require PMI, which can add hundreds of dollars to your payments, but home equity loans don’t.
- You can’t complete a refinance: With rates rising, it’s possible that your mortgage rate is lower than current refinance rates. If that’s the case, it likely won’t make financial sense for you to refinance. Instead, you can use a home equity loan to take out only the money you need, rather than replacing your entire mortgage with a higher interest rate loan.
A cash-out refinance is better if:
- Refinance rates are lower than your current mortgage rate: If you can secure a lower interest rate by refinancing, this could save you money in interest, while providing access to a lump sum of cash.
- You want only one monthly payment: The amount you borrow gets added back to the balance of your mortgage so you make only one payment to your lender every month.
- Less stringent eligibility requirements: If you don’t have great credit or you have a high debt-to-income ratio, or DTI, you may have an easier time qualifying for a cash-out refi compared with a home equity loan.
- Lower interest rates: Cash-out refinances sometimes offer more favorable interest rates than home equity loans.
Who qualifies for a home equity loan?
Although it varies by lender, to qualify for a home equity loan, you’re typically required to meet the following criteria:
- At least 15% to 20% equity built up in your home: Home equity is the amount of home you own. Subtract what you owe on your mortgage and other loans from the current appraised value of your house to get that number.
- Adequate, verifiable income and stable employment: Proof of income is a standard requirement to qualify for a home equity loan. Check your lender’s website to see what forms and paperwork you will need to submit along with your application.
- A minimum credit score of 620: Lenders use your credit score to determine the likelihood that you’ll repay the loan on time. Having a strong credit score -- at least 700 -- will help you qualify for a lower interest rate and more amenable loan terms.
- A debt-to-income ratio of 43% or less: Divide your total monthly debts by your gross monthly income to get your DTI. Like your credit score, your DTI helps lenders determine your capacity to make consistent payments toward your loan. Some lenders prefer a DTI of 36% or less.
Tips for choosing a lender
You’ll want to consider what type of financial institution best suits your needs. In addition to mortgage lenders, financial institutions that offer home equity loans include banks, credit unions and online-only lenders.
“Select a lender that makes you feel comfortable and informed with the home equity loan process,” said Rob Cook, vice president of marketing, digital and analytics for Discover Home Loans. “Look at what tools a lender makes available to borrowers to help inform their decision. For many borrowers, being able to apply and manage their application online is important.”
One option is to work with the lender that originated your first mortgage as you already have a relationship and a history of on-time payments. Many banks and credit unions also offer discounted rates and other benefits when you become a customer.
Some lenders offer lower interest rates but charge higher fees (and vice versa). What matters most is your annual percentage rate because it reflects both interest rate and fees.
Ensure the specific terms of the loan your lender is offering make sense for your budget. For example, be sure the minimum loan amount isn’t too high -- be wary of withdrawing more funds than you need. You also want to make sure that your repayment term is long enough for you to comfortably afford the monthly payments. The shorter your loan term, the higher your monthly payments will be.
“Costs and fees are an important consideration for anyone who is looking for a loan,” Cook said. “Homeowners should understand any upfront or ongoing fees applicable to their loan options. Also look for prepayment penalties that might be associated with paying off your loan early.”
No matter what, it’s important to talk to numerous lenders and find the best rate available.
How to apply for a home equity loan
Applying for a home equity loan is similar to applying for any mortgage loan. You’ll need both a solid credit score and proof of enough income to repay your loan.
1. Interview multiple lenders to determine which lender can offer you the lowest rates and fees. The more companies you speak with, the better your chances of finding the most favorable terms.
2. Have at least 15% to 20% equity in your home. If you do, lenders will then take into account your credit score, income and current DTI to determine whether you qualify as well as your interest rate.
3. Be prepared to have financial documents at the ready, such as pay stubs and Form W-2s. Proof of ownership and the appraised value of your home will also be necessary.
4. Close on your loan. Once you submit your application, the final step is closing on your loan. In some states, you’ll have to do this in person at a physical branch.
We evaluated a range of lenders based on factors such as interest rates, APRs and fees, how long the draw and repayment periods are, and what types and variety of loans are offered. We also took into account factors that impact the user experience such as how easy it is to apply for a loan online and whether physical lender locations exist.
More mortgage tools and resources
Use CNET’s mortgage calculator to help you determine how much house you can afford. The CNET mortgage calculator factors in variables such as the size of your down payment, home price and interest rate to help you understand how much of a difference even the slightest increase in your rate can make in the amount of interest you’ll pay over the lifetime of your loan.