What is a home equity loan? A complete overview

Core Insights - Homeowners can build equity through market appreciation and mortgage payments, allowing them to borrow against this equity for various expenses [1][2] Group 1: Home Equity Loan Overview - A home equity loan is a second mortgage that allows homeowners to borrow against their home equity, providing a lump sum of cash [2] - Home equity loans typically have fixed interest rates, terms ranging from five to 30 years, and fixed monthly payments [3][29] - Interest rates for home equity loans are generally lower than other types of debt due to being secured by the home [4] Group 2: Borrowing Limits and Requirements - Borrowing limits for home equity loans are usually capped at 80% of the home's equity, with calculations based on home value and existing mortgage balance [5][6] - Eligibility typically requires at least 20% equity in the home, a minimum credit score of 680, and a debt-to-income ratio of 43% or less [7][8][28] Group 3: Uses and Benefits - Home equity loans can be used for various purposes, including home improvements, debt consolidation, education expenses, and more [10][16] - Interest paid on home equity loans may be tax-deductible if used for home-related expenses [10] Group 4: Costs and Appraisals - Home equity loans incur closing costs ranging from 2% to 5% of the loan amount, which can include appraisal fees [12][14] - An appraisal is typically required to determine the home's value and the amount of equity available for borrowing [13] Group 5: Alternatives to Home Equity Loans - Alternatives include cash-out refinancing, home equity lines of credit (HELOCs), home equity conversion mortgages (HECMs), and personal loans [19][20][21][24]