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In 2026, home equity loans (HEL) remain a popular way to access cash at lower rates than credit cards (avg. 8% vs 21%). Borrowers can typically access up to 85% of their home's value. Interest is tax-deductible only when used for home improvements.
What is a Home Equity Loan?
A home equity loan, often referred to as a "second mortgage," enables homeowners to borrow a lump sum against the value accumulated in their property.
- Collateral: Your home serves as the guarantee for the loan.
- Payout: You receive a one-time payment.
- Repayment: Fixed monthly payments with interest over a set term (5–30 years).
Looking for a quick comparison? Check out our 2026 Home Equity Lender Comparison Chart here
How Does a Home Equity Loan Work in 2026?
To qualify, lenders evaluate your Combined Loan-to-Value (CLTV) ratio.
Formula: (Current Mortgage + Desired Loan) / Home Appraised Value = CLTV %. Most lenders limit CLTV to 85%, though specialized credit unions may allow up to 90% for high-credit borrowers. You will also need:
- A professional home appraisal.
- A credit score typically above 620 (740+ for best rates).
- Proof of income and debt-to-income (DTI) ratio below 43%.
Why Choose a Home Equity Loan?
- Debt Consolidation: With average credit card APRs hitting 21.39% in 2026, a home equity loan at ~8% can significantly reduce monthly interest costs.
- Home Renovations: Using the loan to build an extension or remodel a kitchen can be tax-deductible and increase your property value simultaneously.
- Fixed Rates: Unlike HELOCs, your interest rate is locked in, providing protection against 2026 market volatility.
Home Equity Loan vs. HELOC: Which is Better?
| Feature | Home Equity Loan (HEL) | Home Equity Line of Credit (HELOC) |
|---|---|---|
| Payout | Lump sum | Revolving credit line |
| Interest Rate | Fixed | Usually Variable |
| Best For | Large, one-time expenses | Ongoing projects / Emergency fund |
| Risk | Fixed debt amount | Potential for rising rates |
What are the Costs and Fees?
Borrowing against your equity isn't free. Expect the following costs:
Closing Costs: Typically 2% to 5% of the loan amount.
Origination Fees: $50 to $500 depending on the lender.
Appraisal Fee: Between $400 and $1,000 in 2026.
Tip
Some online lenders now offer "No-Fee" equity loans, but these often come with slightly higher interest rates.
Home Equity Loan vs. Cash-Out Refinance
A Cash-Out Refinance replaces your entire existing mortgage with a new, larger one. In the current 2026 rate environment, if your original mortgage has a very low rate (e.g., from 2021), a Home Equity Loan is usually better because it allows you to keep your low primary rate and only pay higher interest on the new, smaller loan.
Home Equity Loan vs. HELOC: Choosing Your Cash Flow Strategy
While both options use your home’s equity as collateral, they function differently depending on your financial needs in 2026.
Home Equity Loan (Lump Sum): Best for large, predictable costs. You receive the full amount upfront with a fixed interest rate. This protects you from potential rate hikes later in 2026
ELOC (Credit Line): Best for ongoing projects. It works like a credit card tied to your home. You only pay interest on what you withdraw. However, most HELOCs have variable rates, meaning your monthly payment could increase if market rates rise.
| Feature | Home Equity Loan (HEL) | Home Equity Line of Credit (HELOC) |
|---|---|---|
| Structure | Fixed lump-sum payment with set monthly installments. | Revolving credit line (similar to a credit card). |
| Best For | Debt consolidation or large, one-time expenses (e.g., roof repair). | Phase-based renovations or keeping an emergency fund. |
| Interest Rate (2026) | Fixed: ~7.9% – 8.5% | Variable: ~8.5% – 9.5% |
| Risk Factor | Paying interest on a full lump sum, even if unused. | Monthly payments can spike if market rates increase. |
Home Equity Loan vs. Cash-Out Refinance
The biggest mistake borrowers make in 2026 is choosing a Cash-Out Refinance when they already have a low-rate primary mortgage.
1. Cash-Out Refinance: You replace your entire current mortgage with a new, larger one.
When to choose: Only if current 2026 market rates are lower than the rate on your existing mortgage.
The 2026 Reality: If you locked in a 3% rate in 2021, refinancing into an 8% mortgage just to get cash is extremely expensive.
2. Home Equity Loan (The "Second Mortgage"): You keep your original mortgage (and its low rate) untouched. You simply add a second, smaller loan on top.
- When to choose: When you want to preserve your primary low-interest mortgage but still need access to $50,000 or more for expenses.
Summary: Which path should you take?
For Debt Consolidation: Use a Home Equity Loan to lock in a fixed rate and wipe out high-interest credit card
For home improvements, use a HELOC if you’re doing the work in stages, or a Home Equity Loan for a single large contractor payment.
For Better Mortgage Terms: Use Cash-Out Refinance only if you can lower your overall interest rate while taking out the extra cash.
FAQ: Home Equity Loans in 2026
1. Is the interest on a home equity loan tax-deductible in 2026?
Yes, but with conditions. According to current IRS guidelines, interest is only deductible if the funds are used to buy, build, or substantially improve the home that secures the loan. If you use the money to pay off credit cards or fund a vacation, the interest is not tax-deductible.
2. What is the minimum credit score for a home equity loan in 2026?
Most lenders require a minimum credit score of 620. However, to qualify for the most competitive rates (around 7.9%), a score of 740 or higher is typically needed. Some credit unions may offer flexibility if you have significant equity.
3. How much can I borrow against my home equity?
In 2026, most lenders allow a Maximum CLTV (Combined Loan-to-Value) of 85%. This means the total of your primary mortgage and your home equity loan cannot exceed 85% of your home's current appraised value.
4. Which is better in 2026: a Home Equity Loan or a Cash-Out Refinance?
If your current mortgage has a low interest rate (below 5%), a Home Equity Loan is generally better as it allows you to keep that low rate. A Cash-Out Refinance is only recommended if current market rates are lower than your existing mortgage rate.
5. Can I get a home equity loan with no closing costs?
Yes. Many online lenders in 2026 offer "no-closing-cost" loans. However, be aware that these lenders often compensate by charging a slightly higher interest rate. It is important to calculate whether the upfront savings outweigh the long-term interest costs.
Written bySarah Pritzker
Sarah Pritzker is an insurance expert at BestMoney.com, specializing in pet, life, and home insurance. With years of experience covering online consumer products, she leverages her in-depth knowledge to help readers navigate today’s complex financial landscape.