What is a home equity loan? A complete guide

How does a home equity loan work?

Equity represents the portion of the home you own. It's calculated as the current market value minus your mortgage balance. Lenders confirm this value with a home appraisal or other valuation tool to determine how much equity you have.

Lenders usually allow you to borrow up to 80% or 90% of your home equity.

Once your home equity loan closes, you receive your funds as a lump sum. While adjustable rates may be available from other lenders, Rocket Mortgage offers fixed-rate loans.

You make your monthly payments over a set loan term, as in a traditional mortgage. Because home equity loans usually carry a fixed interest rate, the payment amount stays the same for the entire loan term.

This creates predictability for budgeting and is one of the main differences between a home equity loan and other equity-based products with variable rates.

Keep in mind that because your home is used as collateral, you take on certain responsibilities with this type of debt. Qualification generally depends on factors such as your credit score, income, debt-to-income ratio (DTI), and how much equity you have available to borrow.

When is a home equity loan the right choice?

A home equity loan can be especially well-suited for large, one-time expenses that require up-front funding. Before deciding, consider your long-term financial stability, whether you can access enough equity to meet your goals, and your comfort with the mortgage terms and payment.

Thinking through these elements will help ensure the loan fits into your broader financial picture and repayment expectations. You can use the home equity calculator from Rocket Mortgage to see what your numbers look like.

Pros and cons of home equity loans

Before you decide to get a home equity loan, you should be aware of the pros and cons.

Home equity loan pros

• Predictable payments: Fixed rates are available.
• Lump-sum funding: Getting all your cash at once helps fund major expenses or projects.
• Lower interest rates: Because your home secures the loan, home equity loan rates are generally lower than unsecured loan options.

Home equity loan cons

• Collateral risk: Your home serves as collateral, which exposes you to risk if you miss payments.
• Up-front costs: You'll need to pay home equity loan closing costs and fees.
• Additional payment: You'll need to manage an additional monthly payment since this is a second mortgage.

How to get a home equity loan

The process for getting a home equity loan typically involves confirming your home’s value, reviewing your personal financial qualifications, and preparing the documentation a lender will need.

1. Check your credit score

Credit scores are a key factor in a person qualifying for a home equity loan, and they can also influence the interest rate offered. Stronger credit can improve your loan terms, and reviewing your credit profile ahead of time helps set clear expectations.

Remember, your credit is only one piece of the overall approval process. Still, it’s a key. The minimum credit score for a home equity loan at Rocket Mortgage is 680, but you can use more of your equity at higher scores.

2. Calculate your DTI

Lenders use your debt-to-income ratio (DTI) to assess whether you can comfortably take on a new loan payment. DTI is the percentage of your gross monthly income that goes toward debt payments. Lower DTI can make qualifying easier, but each lender has its own guidelines.

You can figure out your DTI using the following equation:

DTI = (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100

1. Add up all your monthly debt payments, including your primary and secondary mortgage, student loans, car loans, minimum credit card payment, alimony, and child support.
2. Divide the sum by your gross monthly income, which is the amount of money you earn each month before taxes and deductions.
3. Multiply the result by 100 to find the percentage.

For example, if your total monthly debt is $2,100 ($950 for your primary mortgage, a $600 monthly payment for a new home equity loan, $300 for your car loan, and $250 for credit card debt), and you earn $5,000 a month before taxes, your DTI would be 42%.² Rocket Mortgage requires a DTI no higher than 50%.

3. Apply for your home equity loan

The next step is to apply with a lender. Your lender will check your credit as well as income and asset documentation, such as W-2s, 1099s, tax returns, and bank statements. This will allow them to calculate your DTI and officially determine how much equity you qualify to take out.

4. Determine your equity with a home appraisal

Lenders typically verify a home’s current market value through a professional home appraisal. An appraisal is conducted by a licensed appraiser who evaluates the home’s condition, comparable sales in the area, and market trends.

This valuation is essential because equity is calculated as the home’s current value minus the remaining mortgage balance. It helps determine how much you may be able to borrow and whether you meet loan-to-value ratio (LTV) requirements.

In some instances, a home equity loan doesn’t require an in-person appraisal. Automated valuation models (AVMs)³ and other types of valuation exist, but every situation is different.³

5. Close on the loan

This is when the paperwork is signed, and closing costs are paid. If you're taking out a home equity loan on a primary residence, you receive the funds 3 business days after closing. This is because there is a right of rescission that allows you to back out of the loan until that point.

How to choose the best home equity loan

Reviewing interest rates, loan terms, fees, closing costs, and the overall loan structure helps you determine what works best with your financial situation.

Consider how the monthly payment fits into your budget and how the loan aligns with your long-term goals. Review lender disclosures carefully to fully understand the terms, costs, and expectations before moving forward. Look specifically at your Loan Estimate to get a clear picture of what to expect.

This is your chance to really do the math on what different lenders are offering and pick the option that works best for you.

Can you get a home equity loan with bad credit?

Qualification depends on multiple factors, not just your credit. Those who have had past credit issues know that it makes borrowing more difficult, but lower credit scores may make approval harder, but not impossible.

For instance, people with lower credit scores are more likely to qualify for a home equity loan vs. a personal loan. Because home equity loans are secured by your home, they’re less risky for lenders. We encourage you to review your credit profile and consider your alternatives if needed.

Alternatives to home equity loans

While home equity loans can be a helpful option for many homeowners, they aren’t the only way to borrow against your equity or access funding. The best fit depends on your financial goals, comfort level with repayment, and whether you prefer predictable or flexible borrowing.

Cash-out refinance

A cash-out refinance replaces your existing mortgage with a new, larger one, giving you access to some of your equity as cash at closing. Unlike a home equity loan, which adds a second mortgage on top of your original loan, a cash-out refinance restructures your primary mortgage into a new loan with its own rate, term, and payment.⁴

This option may make sense if current mortgage rates are favorable or if you prefer a single monthly payment instead of managing two separate loans. Home equity loan requirements are like those of other mortgage products, and closing costs will apply since you are obtaining a new mortgage. As with any mortgage, keeping up with payments is crucial to avoid foreclosure.

You can decide between a cash-out refinance and a home equity loan by doing a blended rate calculation. If, after calculating the math, your combined rate is lower by taking out a home equity loan, it may be the more cost-effective option. Otherwise, a cash-out refinance might make sense.

Here is the equation to calculate your blended rate:

(((First Mortgage Balance × First Mortgage Rate) + (Second Mortgage Balance × Second Mortgage Rate)) ÷ (First Mortgage Balance + Second Mortgage Balance)) × 100

Home equity line of credit (HELOC)

A HELOC is a revolving line of credit that allows you to borrow against your equity as needed during a defined draw period, rather than receiving one lump sum. HELOCs typically have variable interest rates, meaning the monthly payment can fluctuate over time.

Comparing HELOCs to home equity loans, HELOCs are more flexible for ongoing or unpredictable expenses, but home equity loans offer the possibility of fixed payments if you know what you need up front.

Rocket Mortgage currently doesn't offer HELOCs.

FAQ

If you're still weighing your choices, you're not alone. Let's look at some common questions about home equity loans.

How does a home equity loan differ from a HELOC?

Home equity loans pay a lump sum after closing. HELOCs function as revolving lines of credit with variable rates.

Will taking out a home equity loan hurt my credit score?

A home equity loan may involve a hard credit inquiry, which can temporarily lower your credit score. However, consistent, on-time payments can help build a positive credit history in the long run.

What should I look for when applying for a home equity loan?

Keep an eye on key factors such as the interest rate, loan term, total borrowing costs, and your monthly payment to ensure the loan fits within your budget.

How long does it take to get a home equity loan?

Timelines vary based on appraisal scheduling, documentation review, and unique lender processes. Because these factors take time, it's best to discuss a realistic timeline with your lender directly.

Is a home equity loan tax-deductible?

Tax deductibility depends on how the loan funds are used. You should always consult the IRS or a tax professional for the most up-to-date rules.

The bottom line: A home equity loan could be right for you

Home equity loans may be a good option for homeowners who want a lump-sum payment for a known expense, with the possibility of a fixed rate. Every homeowner’s situation is different, so the best choice depends on your personal finances, your comfort with taking on debt secured by your home, and your long-term planning.

Explore your options, continue researching, and consider speaking with a mortgage professional to map out your path forward. If you're ready, you can apply for a Home Equity Loan today.

¹ Home Equity Loan product requires full documentation of income and assets, credit score and max loan-to-value (LTV), combined loan-to-value (CLTV), and home equity combined loan-to-value (HCLTV) ratios. Requirements were updated 11/19/25 and are tiered as follows: 680 minimum FICO with a max LTV/CLTV/HCLTV of 80%, 700 minimum FICO with a max LTV/CLTV/HCLTV of 85%, and 740 minimum FICO with a max LTV/CLTV/HCLTV of 90%. Your debt-to-income ratio (DTI) must be 50% or below. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Product is a second standalone lien and may not be used for piggyback transactions. Product not available on Ameriprise products. Guidelines may vary for self-employed individuals. Some mortgages may be considered “higher priced” based on the APOR spread test. Higher-priced loans in the State of New York are subject to additional regulatory requirements. Additional restrictions apply. This is not a commitment to lend.

² Any figures, interest rates, loan examples, and market data referenced in this article are hypothetical or aggregated for educational purposes only. They are not intended to reflect current pricing, available terms, or personalized loan options for any consumer. This content does not constitute an advertisement of credit terms, a solicitation or offer to extend credit, or a rate quote under federal or state lending laws. Actual mortgage rates and terms are determined by individual financial qualifications, property characteristics, market conditions, and other factors, and are subject to change without notice. If you are seeking current, real-time mortgage rate information please refer to the official live rate information and product details published at RocketMortgage.com/mortgage-rates, where current pricing and various loan terms are made available.

³ Automated valuation model (AVM) is software that uses existing property details to generate a property’s estimated value. AVM appraisals are valid only for Home Equity Loan products. Not eligible for loan amounts greater than $400,000. When eligible for an AVM, the valuation will automatically be applied. Traditional appraisals available by request. Not eligible for loans already in process. AVMs are not available in all states or on higher-priced mortgage loans that don't meet Qualified Mortgage (QM) requirements. Additional restrictions/exclusions may apply. This is not a commitment to lend.

⁴ Refinancing may increase finance charges over the life of the loan.

This article is for informational purposes only and is not intended to provide financial, investment, or tax advice. You should consult a qualified financial or tax professional before making decisions regarding your retirement funds or mortgage.

Rocket Mortgage is a trademark of Rocket Mortgage LLC or its affiliates.