Disclaimer: The prime rate directly influences the rates on HELOCs and home equity loans.
Key Points
• Home equity loans use the equity in your home as collateral.
• Rates are influenced by your credit score and debt-to-income ratio, among other factors.
• Fixed rates offer the comfort of consistent monthly payments.
• Compare offers from multiple lenders before signing on for a home equity loan.
• Consider alternative borrowing methods like a home equity line of credit or a cash-out refinance.
Here’s a simple look at what a home equity loan is: Technically, a home equity loan is a type of second mortgage. Your first mortgage is the home loan you used to purchase the property, but you can place additional loans against the home if you’ve built up enough equity. Home equity loans allow you to borrow a lump sum based on the amount of equity you have in your home. Here’s an example: If your home is worth $500,000 and you still owe $350,000 on your mortgage, you have $150,000 of equity. Most lenders will allow you to borrow up to 85% of your home equity, though some may allow more.
A home equity loan calculator can help you see how much you might be able to borrow and what payments would look like. You begin repaying your home equity loan right after receiving it. These loans are fixed-rate ones, so your payments would be the same each month. If you miss payments, you could face foreclosure.
Recommended: What Is a Home Equity Line of Credit
The interest rates on different types of home equity loans are influenced by a variety of economic and personal factors. The Federal Reserve’s monetary policy, including changes to the federal funds rate, can have a big impact on lending. Lenders often base their rates on the prime rate. If the prime rate goes up, home equity loan rates are likely to follow. Your credit score and debt-to-income (DTI) ratio also play a big role in the rate you’ll be offered. We’ll take a closer look at that below.
Interest rates help determine how affordable a home equity loan will be for you. Even a fraction of a percentage point can add up to a lot of interest paid over time. This chart shows how rate and loan term affect the amount you’ll pay each month for home equity loans of different amounts. The longer the term, the lower the monthly payments might be, but the more interest you’ll pay over the life of the loan.
| Loan Amount | Loan Term | Interest Rate | Monthly Payment |
|---|---|---|---|
| $100,000 | 20 years | 8.00% | $836 |
| 7.00% | $775 | ||
| 10 years | 8.00% | $1,213 | |
| 7.00% | $1,161 | ||
| $50,000 | 20 years | 8.00% | $418 |
| 7.00% | $388 | ||
| 10 years | 8.00% | $607 | |
| 7.00% | $581 | ||
| $25,000 | 20 years | 8.00% | $209 |
| 7.00% | $194 | ||
| 10 years | 8.00% | $303 | |
| 7.00% | $290 |
Home equity loan interest rates are, like the weather, always changing. It can be tempting to try to wait for a lower rate, and to watch the prime rate while waiting. The prime rate was as low as 3.25% in 2020 and as high as 8.50% in 2023. Such fluctuations can have a significant impact on the cost of borrowing. But no crystal ball can predict future rate movements. Stay informed about economic indicators, but also be prepared to weigh interest costs against your need to borrow, and to time your loan application based on your personal financial situation.
| Date | Prime Rate |
|---|---|
| 9/19/2024 | 8.00% |
| 7/27/2023 | 8.50% |
| 5/4/2023 | 8.25% |
| 3/23/2023 | 8.00% |
| 2/2/2023 | 7.75% |
| 12/15/2022 | 7.50% |
| 11/3/2022 | 7.00% |
| 9/22/2022 | 6.25% |
| 7/28/2022 | 5.50% |
| 6/16/2022 | 4.75% |
| 5/5/2022 | 4.00% |
| 3/17/2022 | 3.50% |
| 3/16/2020 | 3.25% |
| 3/4/2020 | 4.25% |
| 10/31/2019 | 4.75% |
| 9/19/2019 | 5.00% |
| 8/1/2019 | 5.25% |
| 12/20/2018 | 5.50% |
| 9/27/2018 | 5.25% |
You can’t control the prime rate, but there are several steps you can take before filing a loan application to help you qualify for the lowest available rate in the current market.
As noted, you’ll need at least 20% equity in your property to get a home equity loan. Calculating your equity is straightforward: Simply deduct your mortgage balance from your home’s estimated value, as recorded on a real estate site. Then divide the answer by the estimated value to arrive at a percentage. For instance, if your mortgage balance is $400,000 and your home value is estimated at $550,000, your equity is $150,000. Divide $150,000 by $550,000 and you get 27%.
To snag the most competitive home equity loan rates, set your sights on a credit score of 680 or higher. Many lenders favor 700 or more. A robust credit score is a testament to your financial acumen and can open the door to more favorable loan terms. Consistently paying your bills on time and keeping credit card balances in check are tried-and-true methods for giving your score a lift. Scrutinize your credit report for inaccuracies and dispute any you find.
Your debt-to-income (DTI) ratio is a key factor in determining your eligibility for a home equity loan. Most lenders look for a DTI under 50%, but prefer it to be under 36%. This gives lenders confidence that you can handle the additional debt. To calculate your DTI, divide your total monthly debt payments by your gross monthly income. Lowering your DTI is a smart move and can be done by paying down existing debts or increasing your income.
Property insurance is a must-have, especially if you’re in an area prone to flooding or other disasters. It’s a safety net for both you and the lender, ensuring that if something happens to your property, you’re both protected. Make sure your coverage is up to snuff with current market values and meets all the lender’s specific requirements before filing an application.
Recommended: HELOC vs. Home Equity Loan
Online tools can help you understand the financial repercussions of taking out a home equity loan. Here are three you may find handy at various times during your time as a homeowner.
Enter a few details about your home loan and we’ll provide you your maximum home equity loan amount.
Punch in your HELOC amount and we’ll estimate your monthly payment amount for your HELOC.
Use SoFI’s HELOC interest calculator to estimate how much monthly interest you’ll pay .
Using the free calculators is for informational purposes only, does not constitute an offer to receive a loan, and will not solicit a loan offer. Any payments shown depend on the accuracy of the information provided.
Closing costs for a home equity loan are typically 2% to 5% of the loan amount. These fees are pretty standard and include things like appraisals, credit reports, and the nitty-gritty of doing a title search, purchasing title insurance, and getting all your documents in order.
Here’s a perk: The interest on your home equity loan might be tax-deductible if you use it to buy, build, or significantly improve your home. Those filing jointly can deduct interest on loans up to $750,000; for single filers, the ceiling is $375,000. Just remember, this is when you itemize deductions instead of taking the standard deduction. The tax rules around home equity loans are set to change at the end of 2025, so consult a tax advisor to ensure you stay on the right side of current policies.
As you consider how to get equity out of your home, there are a couple additional ways you might go about it. Each of these options has its own unique features and requirements, so lets look at them in more detail:
A HELOC provides you with a line of credit, secured by your home, to use when and how you need it. You’ll only pay interest on the portion of the credit line that you actually use. And during the HELOC’s “draw” period, usually 10 years, you likely won’t have to pay down the principal unless you wish to do so. (A HELOC interest-only calculator can help you see what it would be like to just pay interest during this period.)
After the draw period ends comes the repayment period. Then you’ll repay all that you owe, with interest. And here’s a difference between HELOCs and home equity loans: HELOCs tend to have a variable interest rate. So monthly payments can be a bit unpredictable, although putting your balance and a current rate into a HELOC monthly payment calculator will give you a sense of what you might owe.
To qualify for a HELOC, a credit score of 680 is a common benchmark, but as with a home equity loan, 700 is even better. Keep your debt-to-income ratio under 50% — and ideally, under 36%. Most lenders will let you borrow up to 90% of your equity.
A cash-out refinance is a mortgage refinance. In this scenario, you take out a new loan that’s larger than your existing one, pocketing the difference to use as you wish. The amount you can cash out is typically up to 80% of your home’s value, and most lenders look for a credit score of 620 or higher and a debt-to-income ratio of 43% or less. The interest rates can be fixed or variable. Generally, it’s easier to qualify for a cash-out refi than a home equity loan or HELOC.
One other distinction in the cash-out refinance vs. home equity line of credit or home equity loan equation: A refinance will leave you with a single monthly payment instead of two payments.
When you’re ready to take the plunge and obtain a home equity loan, it’s important to set yourself up for success. Take good care of your credit score, understand your DTI ratio (and take steps to right-size it as necessary), and keep an eye on home equity loan rates in Dallas. Request loan estimates from different lenders, and don’t forget to consider other borrowing options like a HELOC and a cash-out refinance.
SoFi now offers home equity loans. Access up to 85%, or $350,000, of your home’s equity. Enjoy lower interest rates than most other types of loans. Cover big purchases, fund home renovations, or consolidate high-interest debt. You can complete an application in minutes.
Unlock your home’s value with a home equity loan from SoFi.
The monthly payment for a $50,000 home equity loan varies with the interest rate and the term of the loan. At an 8.00% interest rate, for instance, a 20-year loan would have you paying $418 a month. Opt for a 10-year term, and that monthly commitment rises to approximately $607. Consider your budget and goals to pick the term that suits you best.
The monthly payment on a $100,000 home equity line of credit can vary depending on how much of the credit line you have utilized, whether you are in the HELOC’s draw period (paying interest only) or its repayment period (paying both interest and principal), and what your interest rate is. HELOC interest rates are usually variable, adding to the complexity. Your best strategy is to put your principal balance and interest rate into an online calculator to compute what you owe.
There are several factors that can prevent you from getting a home equity loan. Lenders typically require a minimum credit score of 680, a debt-to-income (DTI) ratio of 50% or less, and at least 20% equity in your primary residence. If you don’t meet lenders’ minimum qualifications, you might be denied. Inadequate property insurance can also be a barrier.
Home equity loans come with fixed interest rates and predictable monthly payments. They’re often easier to qualify for than other loans and typically have lower interest rates. This type of loan can provide a substantial lump sum for significant expenses like home improvements, education, or consolidating debt. And here’s a bonus—the interest you pay on a home equity loan used for purchasing, constructing, or renovating a home could be tax-deductible.
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*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
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