Getting a Home Equity Loan in 2025: What It Is and How It Works

Home equity loans offer homeowners a way to access the accumulated value of their property in the form of a lump-sum payment.¹ While the funds can be used for various purposes, it’s generally recommended to allocate them towards investments that can enhance your home’s value, such as renovations.² However, it’s crucial to remember that your home serves as collateral, meaning a failure to repay the loan could lead to foreclosure.³

What is a Home Equity Loan?

A home equity loan allows you to convert a portion of your home’s equity into cash.⁴ You receive the entire loan amount upfront and repay it with a fixed interest rate over a set period, typically ranging from 5 to 30 years.⁵

The amount you can borrow is usually between 80% and 85% of your home’s current value, minus your outstanding mortgage balance.⁶ Some lenders may even allow you to borrow up to 100% in certain cases.

Example Calculation:

If your home is valued at $350,000, and your outstanding mortgage is $200,000, with a lender allowing you to borrow up to 85% of your home’s value:7

Maximum borrowable value: $350,000 * 0.85 = $297,500
Subtract your current mortgage: $297,500 – $200,000 = $97,500
Therefore, you could potentially borrow up to $97,500 as a home equity loan.

Home Equity Loan Rates

Most home equity loan rates are tied to the prime rate, which is a base rate that lenders offer their most creditworthy borrowers.⁸ Lenders then add a margin to this prime rate to determine your final interest rate.⁹ For instance, if the prime rate is 7.5% and a lender adds a 1.75% margin, your rate would be 9.25%.

Current Prime Rate: As of Monday, July 21, 2025, the prime rate is 7.5%. (Note: This prime rate is reflective of data from the provided text, which mentions “Prime rate last week 7.5%”).
Prime Rate in the past year (low): 7.5%
Prime Rate in the past year (high): 8.5%¹⁰

It’s advisable to shop around for quotes from multiple lenders, as margins can vary significantly. Borrowers with higher credit scores and lower debt-to-income (DTI) ratios typically qualify for the most favorable rates.¹¹

Ways to Get the Best Home Equity Loan Rates

To secure the best possible home equity loan rates, ensure your financial health is in top condition:

Review Credit Reports: Obtain your credit reports from Experian, Equifax, and TransUnion.¹² Dispute and correct any errors you find.
Pay Down Debt: Reduce any large outstanding balances, which will also improve your DTI ratio and can lead to better rate offers.
Compare Lenders: Once confident in your application, compare offers from at least three home equity loan lenders. Even minor rate differences can result in substantial savings over the loan term.¹³
Consider Alternatives: Explore other financing options like home equity lines of credit (HELOCs), cash-out refinances, or personal loans, as they might offer more suitable rates or terms for your situation.

How Does a Home Equity Loan Work?

Home equity loans are often referred to as “second liens” or “second mortgages” because they are secured by your home, which serves as collateral.¹⁴ You receive the full loan amount at closing and make fixed monthly payments of principal and interest.¹⁵ This payment is in addition to your primary mortgage payment, so it’s essential to ensure you can comfortably afford both, along with your other monthly expenses.¹⁶

While secured loans typically offer better interest rates than unsecured loans, they also carry the risk of foreclosure if you default on payments.

Before applying, accurately determine the amount you need to borrow, as home equity loans provide a lump sum, unlike a HELOC where you draw funds as needed.¹⁷ Then, calculate your available equity.

How to Use a Home Equity Loan

While you have the flexibility to use home equity loan funds for any purpose, it’s generally recommended to use them for investments that enhance your home’s value or improve your financial standing. Examples include:

Home Improvements/Renovations: Projects that add value to your home.¹⁸
Debt Consolidation: Paying down high-interest debt, such as credit card balances.¹⁹

Interest paid on a home equity loan may be tax-deductible if the loan is used to “buy, build, or substantially improve” your home.²⁰ For loans taken out after 2025, the deductibility of interest may be irrespective of how the funds are used. (Consult a tax professional for personalized advice.)

Home Equity Loan Requirements (Specific to Houston, TX)

While general requirements apply nationwide, specific details can vary by lender and state. In Texas, there are some unique constitutional provisions regarding home equity loans on homesteads.²¹

General Qualification Requirements:

Home Equity: At least 15% to 20% equity in your home is generally required.²² In Texas, the total amount of all loans secured by the homestead (including the home equity loan) cannot exceed 80% of the home’s market value as determined by an appraisal on the closing date.
Credit Score: A credit score of 620 or higher is typically needed, though some lenders in Houston may prefer 660 or even 700+.²³ Higher scores usually lead to better rates.²⁴
Debt-to-Income (DTI) Ratio: Generally, a DTI of 43% or lower is preferred by lenders.²⁵ Some lenders may be stricter (e.g., 36%), while others might go up to 50%.²⁶
Appraisal: Lenders will likely require an appraisal to confirm your home’s fair market value and determine the maximum eligible borrowing amount.²⁷ In Houston, the average cost for a home appraisal for a typical 2,000-square-foot single-family home is around $425, with prices varying based on property size, features, and appraiser demand (e.g., rush appraisals can cost more).²⁸

Texas-Specific Home Equity Loan Laws and Protections (Homestead Property):

Texas has strict constitutional protections for homestead properties, particularly regarding home equity loans.²⁹ Key regulations include:

Loan-to-Value (LTV) Limit: The combined total of all loans against your homestead (including the home equity loan) cannot exceed 80% of the property’s fair market value at the time of closing.
One Loan Rule: Generally, you can only have one active Texas home equity loan (including HELOCs) on your homestead at a time.³⁰
Fees Cap: For loans originated on or after January 1, 2018, fees (excluding survey fees, appraisal fees, title insurance, and title report fees) are capped at 2% of the original principal amount of the loan.³¹
Non-Recourse: The loan must be non-recourse, meaning no personal liability for the homeowner unless fraud is involved.³²
Payment Structure: The loan must be repayable in substantially equal bi-monthly or monthly payments that at least cover the accrued interest.³³
No Cross-Collateral: Lenders cannot require any property other than the homestead as collateral.
Closing Location: The loan closing must occur at the lender’s office, a title company, or an attorney’s office, not at the borrower’s home.
Owner/Spousal Consent: Each owner and their spouse must consent to the loan.³⁴
No Confession of Judgment/Power of Attorney: Lenders cannot require these.
Right of Rescission: Borrowers have a three-calendar-day right of rescission after closing to cancel the loan without penalty.
12-Day Waiting Period: There’s a mandatory 12-day waiting period after the loan application is submitted and a required “Notice Concerning Extensions of Credit” is received before the loan can close.³⁵ This “cooling off” period is in addition to the three-day rescission period after closing.

Home Equity Loan Pros and Cons

Pros:

Fixed Rates: Provides predictable monthly payments, simplifying budgeting.³⁶
Potentially Lower Interest Rates: Generally offers lower rates compared to unsecured personal loans or credit cards, as it’s secured by your home.³⁷
Preserves Primary Mortgage Rate: Your existing, potentially lower, primary mortgage interest rate remains unaffected.
Tax Deductible Interest: Interest may be tax-deductible if the loan is used for home improvements or renovation (consult a tax advisor).³⁸

Cons:

Less Flexibility: Unlike a HELOC, you receive a lump sum, which can be inefficient if you need funds incrementally.³⁹
Interest on Full Amount: You pay interest on the entire lump sum from day one, even if you don’t use all the funds immediately.
Foreclosure Risk: Failure to make payments puts your home at risk of foreclosure.⁴⁰
Closing Costs: You may incur closing costs similar to a traditional mortgage.⁴¹
Due Upon Sale: If you sell your home before the loan is repaid, the outstanding balance of the home equity loan becomes due.

Home Equity Loans vs. Alternatives

Consider these alternatives if a home equity loan doesn’t perfectly fit your needs:

Home Equity Loans vs. HELOCs (Home Equity Lines of Credit)

Feature	HELOC	Home Equity Loan
Loan Funding	Revolving line of credit; draw funds as needed up to a limit.	Lump sum disbursed at closing.
Terms	Draw period (e.g., 10 years) with interest-only payments, followed by a repayment period (e.g., 20 years) with principal and interest.	Fixed repayment period (often up to 30 years) with principal and interest payments from the start.
Rates	Variable rates are common, though some lenders offer fixed-rate options.	Fixed rates, providing predictable payments.
Borrowing Limits	Typically 80%-85% of home equity, some lenders offer more.	Typically 80%-85% of home equity, some lenders offer more.

Home Equity Loans vs. Cash-Out Refinances

Feature	Cash-Out Refinance	Home Equity Loan
Loan Funding	Replaces existing mortgage with a new, larger loan; difference received as a lump sum days after closing.	Lump sum received at closing; primary mortgage remains separate.
Terms	New primary mortgage terms and repayment period (up to 30 years).	Primary mortgage terms are unaffected; separate repayment period (up to 30 years).
Rates	Changes your primary mortgage rate (potentially not ideal if current rates are higher).	Does not affect your primary mortgage rate.
Borrowing Limits	Typically up to 80% of home equity in Texas.	Typically 80%-85% of home equity in Texas, though some lenders allow more.
Texas Specifics	Known as a Texas 50(a)(6) loan. Has unique rules: 80% LTV limit, 2% closing cost cap (excluding certain fees), 6-month waiting period after purchase, 12-month waiting period between cash-out refis, and a 12-day “cooling off” period before closing. Only one 50(a)(6) loan allowed at a time on the property.	Subject to the 80% LTV limit, 2% fees cap, 12-day waiting period, and 3-day right of rescission.