Home Equity Loan vs. Personal Loan: Which Is Better for You?
When comparing a home equity loan vs. a personal loan, know that home equity loans are often best if you need a large amount of money (and own at least some of your home), while personal loans are usually better if you need smaller sums fast.
Both usually charge less interest than a credit card and are repaid at a set monthly rate with fixed interest.
- Home equity loans usually charge less interest than personal loans and let you borrow larger amounts.
- Personal loans can be easier to get, since home loans can require a higher credit score and that you own a certain share of your home.
- Personal loans often let you get your cash quicker, since they usually have a shorter funding time.
- Both personal loans and home equity loans let you use the money for any purpose and are usually repaid in fixed, monthly installments.
Home equity loan vs. personal loan: How they compare
While a home equity loan lets you borrow more than most personal loans do, you may also risk losing your home if you default on the loan.
At the same time, you may find it harder to qualify for a home equity loan, although once you’re approved, you can usually borrow more than with a personal loan.
| Home equity loan | Personal loan | |
|---|---|---|
| Loan amounts | Typically $10,000 to $500,000 | Typically $1,000 to $100,000 |
| Rates | 6.99% to 12.92% | 5.99% to 35.99% |
| Repayment terms | Typically 5 to 30 years | Typically 1 to 7 years |
| Collateral required | Part or all of your home’s equity | None (except for secured personal loans, which use real estate, vehicles, jewelry or other assets for collateral) |
| Fees | Expect closing costs of 2% to 5% (covering origination, appraisal, signing, title and attorney fees) | Origination fees of 1%-12% are common |
| How to qualify | Typical requirements:
| Typical requirements:
|
| Tax implications | Interest on a home equity loan is tax deductible if you use the money for home improvements | None |
| Approval and funding timeline | It can take 2 to 8 weeks to close the loan, with funds usually dispersed three business days later. | Funds are usually received within 1 to 10 business days after approval. |
Information based on a survey of loan offers on LendingTree and other major lenders.
Home equity loan: What to know and when it’s best
Also called a “second mortgage,” home equity loans let you use your home’s value to borrow a large sum that can be spent however you like.
You can potentially get $500,000 or more from a home equity loan, but qualifying can be tricky. Lenders usually want applicants to have a credit score of at least 620 (and some set the bar higher).
You’ll also need to have equity built up in the home — often lenders want at least 15%, though some may let you to get a loan with very little or no equity if you agree to pay higher interest rates.
Home equity loans tend to charge higher interest rates than first mortgages, but lower rates than credit cards or personal loans. The rates are usually fixed, meaning your monthly bill remains constant.
Closing costs of between 2% and 5% of the total loan amount are common too, although not all lenders charge such fees.
Most importantly, know that if you default on a home loan, you risk losing your home through foreclosure.
Pros
- Lower interest costs: Usually has lower interest rates than credit cards or personal loans.
- Fixed payments: Your monthly bill won’t change, making budgeting easier and letting you know exactly when the loan will be paid off.
- Flexibility: Home equity loan funds can be used for whatever you want.
- Tax benefits: You can deduct the home equity loan interest you pay from your income taxes if you used the money to build, renovate or improve your home.
Cons
- Foreclosure: If you default, you risk losing your property.
- Closing costs: Home equity loans can often charge closing fees between 2% and 5% of the total loan amount.
- Harder to qualify for: Lenders usually demand a higher minimum credit score than with credit cards or other loans.
- Loss of equity: The amount of equity you have in the home will drop as your debt increases, and if your home’s value drops, you could end up underwater on your mortgage.
When to choose a home equity loan
A home equity loan can be a good option if you can comfortably afford your current mortgage and other expenses. Some cases where a home equity loan makes the most sense include:
- You have a lot of equity in your home: To qualify for a home equity loan with most lenders, you’ll usually need to have paid off at least 15% of your home’s value, not including interest. In other words, the “loan-to-value (LTV) ratio” (amount of the loan vs. your home’s current market value) will be 85% or less. Usually, the lower your LTV ratio, the more you can borrow.
- You’re seeking low rates, long terms: Home equity loans typically charge less interest than personal loans or credit cards. They also usually give you more time to repay it. Having a good credit score and lots of equity in your home makes lenders more likely to offer you favorable rates and terms.
- You need to borrow a large sum: Home equity loans can be worth $500,000 or more, an amount larger than what most people can get through a credit card or personal loan. In fact, many lenders have a minimum borrowing amount for home equity loans.
Personal loan: What to know and when it’s best
A personal loan lets you borrow money quickly — usually within 10 business days — and then repay that sum, plus interest and fees, in fixed monthly payments.
A personal loan might be for as little $1,000 or as much as $100,000, and repayment terms could be short (say, 12 months) or long (for example, seven years).
You’ll probably pay a higher interest rate than you would with a home equity loan, since no collateral is required, and the lender might charge an origination fee, often between 1% and 12% of the total loan amount.
Qualifying for a personal loan will likely be easier than with a home equity loan, since you don’t need to own a home, and many personal loans require a minimum credit score of just 580.
Pros
- Easier to get: Personal loans usually require a lower minimum credit score than for a home equity loan — sometimes 580 or less.
- Fixed payments: Your monthly bill usually won’t change, making budgeting easier and letting you know exactly when the loan will be paid off.
- Flexibility: Personal loan funds can be used for whatever you want, including debt consolidation.
- No collateral required: Unless it’s a secured personal loan, you don’t risk losing your home or other assets.
Cons
- Higher interest rates: Personal loans tend to charge more interest than home equity loans, though not as much as most credit cards.
- Origination fee: Many lenders charge a one-time origination or processing fee, ranging from 1% to 12% of the loan amount.
- Interest rates could change: While many personal loans are fixed-rate, some do charge variable interest rates, meaning the rate changes based on market conditions.
- Prepayment penalty: Some lenders may charge a fee if you pay the loan off early.
When to choose a personal loan
If you need money fast, personal loans are a good choice. It can also make good sense if you don’t have a strong credit score — or, of course, if you don’t own a home.
- You don’t have a lot of equity in a home: You usually need to own at least 15% of your home to qualify for a home equity loan. If you find a loan with less equity than that, the interest rate could be pretty high, and you could end up owing more than the home is worth if prices drop.
- You want to borrow a smaller amount: Personal loans may be better if you need only a small amount of money, since you may be able to borrow as little as $1,000. Home equity loans, by comparison, might require you to borrow $10,000 or more, which could saddle you with unnecessary debt.
- You need money fast: Personal loan applications are often processed more quickly than home equity loans. You can usually get the money within 1 to 10 business days, and some quick lenders will even distribute funds the same day you sign the loan. Home equity loans, meanwhile, can take a few weeks to close.
Other financing options
Home equity and personal loans aren’t the only kinds of credit out there. You could also consider some of these other ways to borrow cash:
- Home equity lines of credit: A home equity line of credit or HELOC is similar to a home equity loan, except it functions like a credit card, letting you access cash as needed, up to a limit, and borrow as often as you want so long as stay within that limit. Like other home loans though, your house is the collateral, so you could lose it if you default. Also, although HELOCs usually charge lower rates than home equity loans or personal loans, they tend to be variable, meaning the rate you pay could change each month.
- Personal line of credit: Personal lines of credit are also similar to credit cards, letting you charge up to a certain limit and repay the debt as you go. The interest is usually lower than with credit cards, but the rates are often variable, so your monthly payments and financing costs could change.
- Credit card: For those who need to borrow smaller amounts and have a good credit score, a 0% APR credit card may be a lower-cost borrowing option. These cards let you buy on credit or transfer other card balances without paying any interest for a limited time, often 12 to 21 months. But if you don’t pay off what you owe before the promotional period ends, you could end up owing more in interest charges than you would with a home equity or personal loan.
- Cash-out refinance: If you own a home, you can also use a cash-out refinance, which replaces your existing mortgage with a new, larger one and gives you the difference as a lump sum of cash that you can use for whatever you want. The amount you can borrow is limited by the equity in your home, and most lenders require that your LTV ratio be 80% or less. You’ll typically pay less interest on a cash-out refinance than you would with a home equity loan or personal loan, but qualifying for this kind of mortgage can be challenging — you may need a credit score of 640 or more, unless you’re dealing with an FHA loan.
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