Summary
- Home Equity Loan: Offers up to $500,000 with 8-10% interest and up to 30 years of repayment. Requires home equity and a 640 credit score. Slower funding (30-60 days) but lower monthly payments.
- Personal Loan: Quick access to funds (1-7 days), with no collateral required. Higher interest rates (12-15%) and shorter terms (5-7 years). Maximum loan amount up to $100,000 and a 680 credit score needed.
- Choosing Between Them: Home equity loans are ideal for larger, long-term financing needs at lower rates, using your home as collateral. Personal loans suit immediate, smaller financial needs without risking assets.
Home equity loans and personal loans are two popular financing options that can be used for a wide range of expenses. For example, home equity loans and personal loans can be used for things like paying off debt (credit card debt, car loan, student loan, etc), home improvements, educational expenses, and more. However, the best one for you will vary depending on your unique needs and circumstances. This is because home equity loans and personal loans have some notable differences when it comes to rates, terms, and qualification requirements.
If you’re considering a home equity loan, we can help you determine the best ways to not only access your equity but also the most efficient way to use those funds for things like debt consolidation. Find out how House Numbers can help you access your home equity, all at no cost and with no impact on your credit score.
Find the best way to unlock your home equity
House Numbers helps you access your home equity to pay off debt, fund home improvement, or general expenses.
Quick Comparison: home equity loan vs personal loan financing
While the specific rates, terms, and qualification requirements will vary depending on the lender you choose and the strength of your loan application, we’ve listed below typical figures you’re likely to see when shopping rates.
| Home Equity Loans | Personal Loans | |
|---|---|---|
| Loan Amount (typical amounts) | 95% LTV of your home | $100,000 |
| Interest Rate | 8% to 10% | 12% to 15% |
| Repayment Term | Up to 30 years | 5 to 7 years |
| Required credit score | 640 | 680 |
| Debt-to-Income (DTI) Ratio | Up to 50% | Up to 50% |
| Funding Speed | 30 to 60 days | 1 to 7 days |
How home equity loans & personal loans work
Home equity loan
A home equity loan is a type of second mortgage that uses your home as collateral. They’re secured loans that are additional housing payments that you must make on top of your existing first mortgage loan. Lenders often require an appraisal to determine the value and condition of your property as a key determining factor in whether you get approved for a loan, and for how much. Check out our tips on how to increase your home’s appraised value.
With your home being used as collateral for the loan, lenders can foreclose if you default on payments. Foreclosure timelines vary by location, but you typically won’t be in danger of this until at least 120 days of delinquency.
Home equity loans typically can also be structured in one of two ways. Loans can be issued as a closed-end loan or as a home equity line of credit (HELOC). Closed-end home equity loans have funds issued in a single lump sum. HELOCs, on the other hand, give you the flexibility of continuously drawing funds up to the credit limit you’re issued. Check out our guide on how second mortgages work to learn more about the differences between a home equity loan and a HELOC.
Personal loan
Compared to a home equity loan, one of the biggest differences with a personal loan is that it is an unsecured loan, typically requiring no collateral in order to get approved. As a result, personal loans tend to carry higher interest rates and smaller loan amounts. Eligibility criteria are also typically more strict, and it will be more difficult to qualify with fair or poor credit.
Who should consider a home equity loan
If you fall into the following scenarios, a home equity loan might be a good fit for you:
You want to borrow a large amount of money
You can get much larger loan amounts with a home equity loan compared to a personal loan. Of course, you’ll still need to be able to afford the larger payments that come with a bigger loan amount, but if you can, then a home equity loan can be the right choice for large expenses. Some examples can include college tuition, home improvements, home repairs, debt consolidation, and large unexpected expenses that a personal loan might not cover.
You have equity in your home
One of the most common requirements to get a home equity loan is that you must have sufficient equity in the property. To determine if you have enough equity, you’ll need to calculate your combined loan-to-value (CLTV) ratio. Most lenders have a maximum CLTV of 95%. The CLTV ratio can be calculated by taking the total balance of your mortgage loans against the home, adding the amount of the home equity loan you want to get, and then dividing that number by the value of your property.
To see some examples of how to calculate LTV ratios, you can check our guide and learn how much equity you have in your home.
You do not need funds quickly
Home equity loans can take between 30 and 60 days to get approved and funded. Much of this time is used by the lender to review your qualifications, such as your credit, income, and property characteristics. The sooner you provide the required documents to the lender, the faster you can get funded. However, the timeline can also vary based on the lender’s volume of applications as well as the complexity of your loan application.
You want lower monthly payments or a long repayment term
Home equity loans usually have repayment periods between 10 and 30 years, something that can help if you want to have lower monthly loan payments. Personal loans, by comparison, typically have repayment terms between 5 and 7 years.
Home equity loan pros & cons
Home equity loan pros
You can get lower interest rates compared to unsecured personal loans
Since a home equity loan uses your property as collateral, it represents a lower risk to lenders because they can foreclose to recoup some losses in the event of non-payment. As a result, interest rates are typically more favorable compared to other types of loans.
Larger loan amounts are available compared to other loan options
If you have enough equity to support a larger loan amount, a home equity loan can provide you with more funding than other types of loans. Note, however, that some lenders may impose a maximum loan amount regardless of the value of your home or the amount of equity you have.
You can have lower monthly payments with longer repayment terms
If you’re not in a rush to pay off the loan or want the flexibility of more manageable payments, a home equity loan can provide you with lower minimum required payments. Keep in mind though, that the longer you have the loan, the more interest charges you’ll end up paying.
Home equity loan cons
Closing costs are more expensive.
Closing costs on a home equity loan often range from 1% to 4%. Lenders that don’t charge these fees upfront may assess an early closure fee or prepayment penalties. Learn more about what closing costs consist of in our guide on home equity loan fees.
It’s difficult to get more than one loan at a time for the same property
While it’s possible to have more than one home equity loan for the same house, many lenders do not allow for more than two mortgages. If you think you might need more funding in the future, a home equity line of credit might be a better fit. You may also need to consider using both a home equity loan and a personal loan for any future financing needs.
Funding speeds are slower than other financing options
If you’re in need of funds quickly, a personal loan may be better suited for your needs. Home equity loans often take more than one month to get approved and funded. What you may be able to consider, however, is to initially obtain a personal loan to meet your more immediate funding needs, and then pay it off with a home equity loan later.
It can be challenging to get through the loan approval process
Home equity loans often require more paperwork compared to personal loans. The more complex your circumstances, the more paperwork that is usually required. Gig and self-employed workers who would like to apply, for instance, may be asked to give multiple years of tax returns and additional financial statements that salaried workers would not otherwise have to provide.
Find the best way to unlock home equity
Who should consider a personal loan
If you fall into one or more of the following circumstances, it could mean that a personal loan may be more well-suited for your needs compared to a home equity loan.
You need funds quickly
Personal loans can be approved and funded in as little as 24 hours. Of course, this might depend on the lender you choose, and you’ll also likely need to have a strong credit score and income. Additionally, the fast funding speed of many personal loans often comes at the cost of higher interest rates.
You don’t have a home or sufficient home equity
Personal loans don’t require you to own a home as they don’t require collateral in exchange for funding. If you have less than 5% equity in your property or otherwise don’t own real estate, you’ll still be able to consider personal loans for funding.
You plan on paying off the loan more quickly
Personal loans can carry higher payments due to the shorter repayment terms, usually 7 years or less. This can make a personal loan a better option if you’re looking to pay off debt more quickly to save on interest charges.
You don’t need to borrow a large amount of money
Since personal loans don’t normally require collateral, loan amounts tend to be smaller than what you can get on a home equity loan. If you need less than $100,000, a personal loan could be a more ideal fit. If you need a larger loan amount, a home equity loan might be better suited for you.
You don’t want to risk losing your home
While it’s never a good idea to take out a loan with the intention of defaulting, unexpected life circumstances can occur that may strain your personal finances. Depending on your appetite for risk and the stability of your finances, you might prefer personal loans as they don’t require you to pledge your home as collateral.
Personal Loan Pros & Cons
Personal loan pros
You can get multiple personal loans more easily
If you find out you need more funding, it’s easier to apply and get an additional personal loan. Lenders that issue home equity loans, on the other hand, typically won’t issue additional home loans if you already have a primary mortgage and a second mortgage on the same property.
Approval and funding speeds are much faster
It’s possible to get funded in as little as 24 hours on a personal loan. This is because documentation requirements are easier as there are fewer items to verify. Home equity loans, on the other hand, require far more documentation and due diligence with regard to your credit, income, property value, condition of your home, and its characteristics.
You won’t need to use your home as collateral
If you don’t want to risk losing your home in foreclosure, a personal loan is the better choice compared to a home equity loan. Personal loans don’t require collateral, whereas home equity loans use your home as collateral, giving the lender the ability to foreclose in the event of default.
Personal loan cons
Personal loan interest rates are not as competitive as home equity loans
Interest rates on personal loans tend to be higher than what you can get on a home equity loan. This is largely due to the fact that personal loans represent a greater risk to lenders since they’re not secured by any collateral. In the event of default, lenders are far less likely to recoup any losses. As a result, most charge a higher interest rate to account for the increased risk of lending.
You can’t get as much funding as a home equity loan
Personal loans typically max out at around $100,000 for the most well-qualified borrowers. Without being secured by any collateral, lending larger amounts is far riskier for banks. Home equity loans, on the other hand, can allow for higher loan amounts since they’re secured by the value of your home.
Repayment terms and monthly payments could be higher
Personal loans don’t carry repayment terms as long as home equity loans. Depending on the loan amount and terms you get, your monthly payments could be higher than what you’d get on a home loan. If your income and employment are not stable, consider the likelihood of your monthly cash flow being impacted during the life of the loan, and whether you could still continue making timely payments.
How can I get a home equity loan or personal loan?
To get a home equity loan, we recommend shopping interest rates with multiple lenders including banks, credit unions, and online lenders. This will increase your chances of getting the best rate possible. Once you’ve decided which lender you want to use, you’ll need to submit a loan application and then provide any required documentation.
To learn more about each of the stages involved with getting a loan, check out our guide on the mortgage underwriting process. The article contains detailed information on what lenders consider when determining whether to issue a loan approval.
How do I choose between a home equity loan or a personal loan?
While funds from a home equity loan and personal loan can often be used for the same purposes such as debt consolidation or home improvements, each has differences in interest rates, terms, and qualification requirements. And although it’s possible to get both a home equity loan and a personal loan, it’s important to understand the pros and cons of each. For those who can only choose one, understanding your personal circumstances can help you pick the one best suited for your needs.
