What Is a Home Equity Loan?
A home equity loan, sometimes called a second mortgage, allows homeowners to borrow a lump sum of money using the equity in their home as collateral. Unlike a home equity line of credit (HELOC), which functions as a revolving credit line with variable rates, a home equity loan provides a fixed amount at a fixed interest rate with predictable monthly payments over a set repayment period, typically ranging from 5 to 20 years. The loan is secured by a second lien on your property, meaning your primary mortgage retains first-lien priority. Home equity loans are commonly used for major expenses such as home renovations, debt consolidation, medical bills, or education costs. According to the Consumer Financial Protection Bureau, lenders generally allow you to borrow up to 80% to 85% of your home's appraised value minus your existing mortgage balance, though some lenders may extend this to 90% for borrowers with excellent credit.
How Much Can You Borrow?
The amount you can borrow with a home equity loan depends on three factors: your home's current market value, your outstanding mortgage balance, and the lender's maximum combined loan-to-value (CLTV) ratio. Most lenders cap the CLTV at 80%, meaning the total of your first mortgage plus the home equity loan cannot exceed 80% of your home's value. For example, if your home is worth $400,000 and you owe $250,000 on your primary mortgage, your available equity is $150,000. At an 80% CLTV limit, you could borrow up to $70,000 ($400,000 x 0.80 = $320,000, minus $250,000 = $70,000). Some lenders offer up to 85% or even 90% CLTV for borrowers with credit scores above 740 and low debt-to-income ratios. Your credit score, employment stability, and existing debts also influence the approved amount and interest rate. It is important to get a current appraisal or at minimum a reliable home value estimate before applying, as the lender will use their own appraisal to determine your property's worth.
Home Equity Loan vs HELOC
While both products leverage your home equity, they serve different financial needs. A home equity loan delivers a single lump sum with a fixed rate and fixed monthly payment, making it ideal for one-time expenses with a known cost, such as a kitchen renovation or paying off high-interest credit card debt in full. A HELOC, by contrast, works like a credit card with a draw period (typically 10 years) during which you can borrow and repay repeatedly, paying only interest on the amount drawn. HELOCs carry variable interest rates that fluctuate with the prime rate, which introduces payment uncertainty. After the draw period ends, a HELOC enters a repayment phase where you make fully amortizing payments on the outstanding balance. Home equity loans typically carry rates 0.5% to 1.0% higher than HELOCs because the lender cannot adjust the rate over time. For borrowers who prefer payment stability and need a specific dollar amount, the Federal Reserve's guide to home equity borrowing recommends the fixed-rate home equity loan as the more predictable option.
Home Equity Loan Rates in 2026
Home equity loan rates are influenced by the federal funds rate, borrower creditworthiness, loan-to-value ratio, and market conditions. As of early 2026, average home equity loan rates range from approximately 7.5% to 10.5%, depending on the borrower's credit score and the loan term. Borrowers with excellent credit (740+) and low CLTVs can typically secure rates near the lower end of this range, while those with fair credit (620-679) or higher CLTVs may see rates approaching or exceeding 10%. Unlike primary mortgage rates, home equity loan rates tend to be 1.5% to 3.0% higher because the second-lien position increases the lender's risk in the event of default. Shorter loan terms (5 to 10 years) generally carry lower rates than longer terms (15 to 20 years). Shopping multiple lenders is essential, as rate offerings can vary by more than a full percentage point between institutions for the same borrower profile. Credit unions and community banks often offer the most competitive home equity loan rates compared to large national banks.
Tax Deductibility of Home Equity Loans
Under the Tax Cuts and Jobs Act of 2017, the rules for deducting home equity loan interest changed significantly. Interest on home equity loans is only tax deductible if the loan proceeds are used to "buy, build, or substantially improve" the taxpayer's home that secures the loan. This means interest on a home equity loan used for a kitchen remodel or room addition remains deductible, while interest on a loan used for debt consolidation, college tuition, or other non-home-improvement purposes is not deductible. The combined total of all mortgage debt (first mortgage plus home equity loan) must not exceed $750,000 for married couples filing jointly, or $375,000 for married individuals filing separately. These limits apply to the total of acquisition indebtedness across all qualified residences. To claim the deduction, you must itemize your taxes rather than take the standard deduction. The IRS Publication 936 provides detailed guidance on what qualifies as deductible home mortgage interest. Consult a tax professional to determine whether your specific use of home equity loan proceeds qualifies for the interest deduction under current law.