How a Home Equity Loan Works
A home equity loan lets you borrow a lump sum against the equity you have built in your home. Unlike a mortgage, which finances the purchase of a home, a home equity loan is a second lien — secured by the same property. You receive the funds all at once, repay them in equal monthly installments at a fixed interest rate, and the loan is fully amortized by the end of the term.
Because your home serves as collateral, home equity loans typically carry lower interest rates than personal loans or credit cards. Rates are usually 1–3 percentage points above current 30-year mortgage rates, depending on your credit profile and CLTV.
How Much Can You Borrow? The 85% CLTV Rule
Most lenders cap home equity lending at 85% of your home's combined loan-to-value (CLTV). CLTV is your total mortgage debt divided by your home's current market value. The formula for maximum borrowing is:
Maximum Loan = (Home Value × 0.85) − Existing Mortgage Balance
For example, a home worth $500,000 with a $300,000 mortgage balance gives you a maximum home equity loan of ($500,000 × 0.85) − $300,000 = $125,000. Some lenders extend to 90% CLTV for borrowers with excellent credit, but qualifying terms are stricter.
| Home Value | Mortgage Balance | Current LTV | Max Equity Loan (85%) |
|---|---|---|---|
| $300,000 | $150,000 | 50% | $105,000 |
| $400,000 | $250,000 | 62.5% | $90,000 |
| $500,000 | $300,000 | 60% | $125,000 |
| $600,000 | $400,000 | 66.7% | $110,000 |
| $750,000 | $400,000 | 53.3% | $237,500 |
Home Equity Loan vs. HELOC
Both products let you tap home equity, but they work very differently. A home equity loan is a single disbursement at a fixed rate — ideal when you know exactly how much you need (a renovation, debt consolidation, a major purchase). The fixed rate and fixed payment make budgeting straightforward.
A HELOC is a revolving credit line with a variable rate. During the draw period (typically 10 years), you borrow only what you need and pay interest only on the balance drawn. This flexibility makes HELOCs better for ongoing expenses or projects where costs are uncertain. The trade-off is rate risk: if interest rates rise, your monthly payment rises too.
The Payment Formula
Home equity loans use the same standard amortization formula as mortgages. The monthly payment is calculated as:
Where P is the loan principal, r is the monthly interest rate (annual rate ÷ 12), and n is the total number of monthly payments (years × 12). Because home equity loans are fully amortizing with a fixed rate, the payment does not change month to month — only the split between interest and principal shifts as the balance decreases.
Worked Example: Calculating Your Monthly Payment
Suppose you take a $150,000 home equity loan at 7.0% fixed over 10 years. Here is how the monthly payment is calculated step by step.
That $58,980 is about 39 cents of interest for every dollar borrowed. The tradeoff is term length: a 15-year term on the same loan drops the monthly payment to $1,348 but raises total interest to $92,640. A 5-year term brings total interest down to $29,700 but requires a $2,970/month payment. The calculator lets you adjust both the rate and the term to find the balance that fits your budget.
Current Home Equity Loan Rates and What Affects Yours
Home equity loan rates in 2026 range from approximately 7.5% to 10% for well-qualified borrowers, running 1–3 percentage points above the 30-year fixed mortgage rate. Unlike HELOCs, which are variable and track the prime rate, home equity loan rates are fixed at closing — so you lock in your rate for the full term regardless of what happens to interest rates afterward.
Four factors have the largest impact on the rate a lender offers you:
- Credit score. A 760+ score typically qualifies for the best rates. Dropping from 760 to 680 can add 0.5–1.5 percentage points to your rate. On a $100,000 loan over 10 years, a 1% rate difference costs about $5,500 in additional interest.
- Combined loan-to-value (CLTV). Borrowing at 70% CLTV gets a better rate than borrowing at 85% CLTV — lower CLTV means less risk for the lender. If you can reduce the loan amount to stay below 80% CLTV, rates improve meaningfully.
- Loan term. Shorter terms (5–10 years) usually carry slightly lower rates than 15-year terms because the lender's exposure period is shorter.
- Lender type. Credit unions and community banks often offer home equity loans at rates below what big banks advertise — worth getting at least one quote from each category before committing.
When a Home Equity Loan Is (and Isn't) the Right Choice
A home equity loan works best when you need a defined lump sum for a specific purpose and want payment certainty. Home renovations, consolidating high-rate credit card debt, or covering a large one-time expense (medical bills, tuition) are the most common use cases. The fixed rate and fixed payment mean you know exactly what you owe each month for the full term — there are no surprises if market rates rise.
It is less suitable when the project costs are uncertain or spread over time (use a HELOC instead), when you plan to sell the home within a few years (closing costs on a home equity loan can run $500–$1,500, reducing the benefit of a short-term loan), or when tapping equity would leave you with less than 15–20% remaining equity in a declining market. Putting your home up as collateral for a depreciating asset or unsecured spending is high-risk — if home values fall and you miss payments, you could owe more than the home is worth.
Questions You Might Ask
How much can I borrow with a home equity loan?
Up to 85% of your home's combined loan-to-value, minus your existing mortgage balance. On a $500,000 home with a $300,000 mortgage, that is $125,000. Some lenders go to 90% for excellent-credit borrowers.
What is the difference between a home equity loan and a HELOC?
A home equity loan gives you a lump sum at a fixed rate. A HELOC is a revolving line at a variable rate — you draw what you need during a draw period, then repay the balance. Home equity loans are better for one-time, defined expenses; HELOCs are more flexible for ongoing needs.
Are home equity loan payments tax-deductible?
Only if the funds are used to buy, build, or substantially improve the home securing the loan. Interest used for other purposes — debt consolidation, vacations — is not deductible under current law. Consult a tax advisor for your situation.
What credit score do I need?
Most lenders require a minimum score of 620. Scores of 700 or above qualify for the best rates. Lenders also typically require a DTI below 43% and at least 15–20% equity in your home.
Methodology
This calculator uses the standard fixed-rate amortization formula (M = P × [r(1+r)^n] / [(1+r)^n − 1]) as specified by the Consumer Financial Protection Bureau (CFPB) for installment loan payment disclosures. Available equity is calculated as home value × 0.85 − existing mortgage balance, consistent with conventional lender CLTV limits. All calculations run client-side in your browser — no data is transmitted or stored. Rate benchmarks reflect 2026 market conditions sourced from Bankrate and Freddie Mac PMMS data. Last updated: June 2026.