How Long Are Home Equity Loan Terms?

Learn about average home equity loan term lengths and why they matter

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A home equity loan is a term loan secured by a second mortgage that lets you borrow against a portion of your available equity. Homeowners use these loans for a variety of purposes, such as to consolidate debt, pay for a wedding, or cover college tuition.

Upon approval for a home equity loan, you’ll receive the amount as a lump sum, which you’ll repay through monthly payments over a set term. But how long of a term can you expect for a home equity loan? Here’s a look at the typical range of terms offered by lenders and how different term lengths will affect your overall costs.

Key Takeaways

  • Home equity loan terms typically range from five to 30 years, depending on your lender.
  • The longer the term, the lower your monthly payment amount and the higher your total cost.
  • A home equity loan can be a good option when you need a large amount of money and you’re prepared to start making repayments right away.
  • A HELOC is a better choice when you need money in stages or aren’t sure how much you’ll need.
  • A cash-out refinance may be better if you can find one with a lower interest rate than your current primary mortgage.

Typical Home Equity Loan Terms

The term length of a home equity loan tells you how long you’ll have to repay the amount you borrowed. Typically, lenders offer a few different term options that can range anywhere from five to 30 years.

Term lengths vary by lender and can also vary depending on how your personal financial metrics stack up to a lender’s requirements.

Once you choose a term, your loan amount and interest costs will be divided according to the number of months in the term. If you have a fixed interest rate, your payments will be equal throughout the duration of your loan term. However, with a variable rate, your payments will change over time as your rate increases or decreases.

Comparing Home Equity Loan Terms

How much of a difference can the loan term make to your monthly payment amount and total interest costs? Let’s look at an example of a $120,000 home equity loan to see the costs of choosing terms ranging from five to 30 years.

Term Loan Amount Interest Rate (Fixed) Monthly Payment Amount Total Interest Total Amount
5 years $120,000 5.60% $2,297.68 $17,860.94 $137,860.94
10 years $120,000 5.65% $1,311.25 $37,350.30 $157,350.30
15 years $120,000 5.70% $993.28 $58,790.79 $178,790.79
20 years $120,000 5.80% $845.93 $83,023.00 $203,023.00
30 years $120,000 6.60% $766.39 $155,900.61 $275,900.61

For these calculations, we assumed the applicant has a good credit score (680 to 729), a $400,000 property value, and a $200,000 outstanding mortgage balance, and lives in Fresno County, CA.

As the figures show, shorter loan terms result in higher monthly payment amounts and lower overall costs. Not only does a longer term increase your costs due to the extra years of interest being charged, but it also typically comes with a higher interest rate.

The best term length is often the one with the highest monthly payment that you can comfortably afford, because it will reduce your overall interest costs. In this example, opting for the 15-year term over the 30-year option would save you nearly $100,000 in interest costs.

Home Equity Loan vs. HELOC

When looking into your home equity financing options, many lenders offer both home equity loans and home equity lines of credit (HELOCs). Before you apply, it’s important to consider whether a HELOC or home equity loan would be better for your needs.

HELOCs make a credit line available to you for a set amount of time known as the draw period, which often lasts five to 10 years. During the draw period, you can use the credit line as needed and are only charged interest (at a variable rate) on amounts you use. Once the draw period ends, you’ll repay the outstanding balance in a balloon payment or convert the balance into a term loan that you’ll repay over five to 30 years.

Home equity loans can be best when you need a specific loan amount all at once and are ready to start repaying the debt right away. For example, a home equity loan may be a good fit when you want to put a down payment on a second home or consolidate your debt.

HELOCs are better when you need access to funds in stages, aren’t sure how much you’ll need, or want time before making full repayments on the amount you borrowed. For example, a HELOC can be great when funding a home improvement project that you’ll pay for in milestones and that might involve surprise costs.

Home Equity Loan vs. Cash-Out Refinance

Another home equity financing option is a cash-out refinance. If you go this route, you’ll refinance your original mortgage for more than you owe and cash out a portion of your equity. As a result, you’ll only have one mortgage payment, whereas with a home equity loan and your original mortgage, you would have two.

Additionally, cash-out refinances typically come with lower interest rates than home equity loans because they’re first mortgages, which means the lender is first in line to seize your home if you default. Home equity loans are second mortgages, which come with a bit more risk for the lender and thus, higher interest rates for borrowers.

To figure out whether a cash-out refinance or home equity loan is best for you, you’ll have to crunch the numbers. While cash-out refinances often have lower rates than home equity loans, your current mortgage rate may be lower. In that case, it can make more sense to keep your existing mortgage rate and get the separate second mortgage using a home equity loan.

Is a Home Equity Loan Right for You?

If you own a home, have equity, and need funds, a home equity loan is worth considering. However, before jumping into it, figure out if it will be the best way to borrow against your equity. If you’re planning to use the funds to make a large, one-time purchase and are ready to start making repayments immediately, a home equity loan could be a good fit. To find the best deal, shop around with a few lenders and compare the costs of a cash-out refinance.

How Long Does It Take to Get a Home Equity Loan?

In most cases, it takes between two and six weeks to get a home equity loan. However, the timing depends on your lender’s application, approval, and disbursement processes. If you need the funds by a certain date, it’s worth asking this question as you shop around to get an idea of which lenders will be best able to match your timeline.

How Much Can You Borrow on a Home Equity Loan?

Lenders allow you to borrow up to a certain percentage of your available home equity. In most cases, the limit is 80%. So if your home is worth $350,000 and you owe $250,000, you’d have $100,000 of available equity and may be eligible to borrow up to $30,000 after accounting for your first mortgage of $250,000. Check with your lender for the limit that will apply to you.

How Do You Pay Back a Home Equity Loan?

Home equity loans are repaid through monthly installment payments over a set term that usually starts shortly after your loan is disbursed. Check your loan agreement for your repayment schedule or ask your lender for more details.

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