Being a homeowner has its perks. Perhaps the biggest one is being able to tap into your home’s value with a home equity loan.

But just owning a home doesn’t automatically mean you qualify. You’ll still need enough equity, along with the income and credit to back it up.

Let’s walk through what a home equity loan is, the pros and cons to getting one, and what you’ll usually need to qualify.

What Is a Home Equity Loan?

A home equity loan lets you borrow against the value you’ve built up in your home. Simply put, your home acts as the collateral, and you receive the money as a lump sum. People often use these funds for things like home projects, paying off high-interest debt, covering big expenses, or even helping with college costs.

Your equity is just the difference between what your home is worth and what you still owe on your mortgage.

For example, if your home is worth $100,000 and you still owe $50,000, your equity is $50,000.

To get a rough idea of your home’s value, you can use online tools or check your local property assessment records. But for the most accurate number, lenders usually require a professional appraisal, which typically costs between $300–$400.

So, in this example, you might think, “Great! I can borrow $50,000.” Not so fast. There are a few more factors that go into how much you can actually borrow. We’ll cover those next and help you decide whether a home equity loan is right for you.

When Should I Consider a Home Equity Loan?

The idea of borrowing a larger amount of money at a competitive rate can sound pretty great, especially if you’re planning home upgrades or need help covering a large expense. That said, a home equity loan isn’t the right fit for everyone.

A home equity line of credit (HELOC) is another solid option. A HELOC gives you access to funds as you need them, instead of all at once, which can be helpful if your expenses are spread out over time.

No matter which option you choose, the goal is the same: get the best rate you can to keep your borrowing costs as low as possible.

Pros of Home Equity Loans

One of the biggest perks of a home equity loan is the lower interest rate. Since your home is used as collateral, rates are usually much better than what you’d get with a credit card or personal loan, meaning you’ll likely pay less in interest over time.

Because the loan is secured by your home, it can also be easier to qualify compared to unsecured loans, especially if you have solid equity built up.

Additionally, most home equity loans come with a fixed interest rate and predictable monthly payments, making budgeting a lot easier. And depending on how you use the money, especially for major home improvements, the interest may even be tax deductible.

Cons of Home Equity Loans

A home equity loan is still a loan, which means more debt and another monthly payment on top of your mortgage. And because your home is used as collateral, missing payments can seriously hurt your credit. In worst-case scenarios, you could even risk losing your home.

There are also fees to factor in, including closing costs that can sometimes add up to a few thousand dollars. Before you apply, make sure you understand all the fees, terms, and conditions so there are no surprises later.

Smart Ways to Use a Home Equity Loan

Now that you’ve got a handle on the pros and cons, it’s worth mentioning that this type of loan is best saved for bigger, more meaningful expenses as opposed to everyday purchases.

Here are some common situations where a home equity loan can make sense:

• Making major home upgrades or necessary repairs
• Covering medical bills
• Consolidating high-interest credit card debt
• Paying for college tuition and fees
• Funding weddings or special trips

Additionally, home equity loans can be used to help buy a vehicle, but it’s usually smart to check out traditional auto loans first to see which option offers the better deal.

How to Qualify for a Home Equity Loan

Just because you have equity in your home doesn’t automatically mean you’re approved. Like any other loan, there are a few boxes you’ll need to check before a lender says yes.

Your credit score is a big one. Most lenders look for a minimum score of around 620, but the closer you are to 700 or higher, the better your chances (and the better your rate is likely to be).

Next is your ability to repay the loan. Your bank or credit union will review your income and your debt-to-income ratio (DTI), which compares how much you owe each month to how much you earn. A DTI under 50% is usually the goal.

Then there’s your loan-to-value ratio (LTV). In most cases, lenders want your total loans to equal no more than 80% of your home’s value, which means you’ll need at least 20% equity.

Here’s a simple example: If your home is worth $100,000, you still owe $50,000, and you want to borrow $20,000, your total loan amount would be $70,000. Divide that by your home’s value, and your LTV equates to 70%, which is right where you want to be.

Final Thoughts on Home Equity Loans

These are the basic guidelines most lenders follow, but every credit union and bank has its own requirements. That’s why it’s always smart to compare options and find the home equity product that works best for your goals and your budget.

Taking out a home equity loan is a big move. When used wisely, it can make a real difference, whether you’re upgrading your home or getting ahead of high-interest debt. Ready to take the next step? Click below to explore how you can put your home’s value to work.