Home Equity Loan

A home equity loan is a secured loan that allows you to borrow against your home's equity. You build equity in your home as the difference between your home's value and how much you owe grows. 

This option is a secured loan, meaning your home is your guarantee that you'll pay, and if you fail to do so, your lender can repossess your home in response. Since it is secured, interest rates are lower than you'd find with unsecured loans like personal loans. 

A home equity loan typically offers a fixed rate over 15 or 30 years. 

Personal Loan

On the other hand, a personal loan is an unsecured loan, meaning there is nothing the lender can repossess if you fail to pay. For that reason, they take on more risk and will offer you a higher interest rate in return. This means you will pay more in interest over the life of your loan. 

Home Equity Loan vs. Personal Loan Comparison



Home Equity Loan Personal Loan
Disbursement You receive a one-time lump sum payment You receive a one-time lump sum payment
Repayment You have the option to repay your loan over a longer period - typically 15 or 30 years You will typically repay your loan over a shorter period
Interest Rates You receive a lower fixed interest rate since it is a secured loan You receive a higher fixed interest rate since it is an unsecured loan
Borrowing Limits You can usually qualify for a higher loan amount since it is based on how much equity is in your home. Lenders will typically allow you to borrow 70-80% of the total equity in your home. You can usually qualify for a lower loan amount since the loan is based on your income and credit history alone
Pros
  • Interest rates are lower than credit cards or personal loans
  • You can typically qualify for a more considerable amount than you could get through a traditional loan
  • You can use the funds for any reason
  • There is a quick approval process
  • You can use the funds for any reason
  • Your home is not at risk if you fail to make your payments as agreed
Cons
  • Your home is at risk if you fail to make payments as agreed upon
  • The process takes longer to complete
  • You have to pay additional fees such as closing costs and origination fees
  • It’s typically harder to qualify for large amounts
  • If you have a low credit score, your interest rate could be relatively high
Special considerations
  • There are no restrictions on using your loan funds
  • If you want a tax write off and tax benefits, the money must be used to make home improvements
  • There are no restrictions or tax benefits associated with the loan

How To Determine the Best Loan For Me

Now that you have a better understanding of the difference between the two, here’s a quick guide to help you determine the best loan for you. 

Personal loans are best for you if you:

  • Want to secure your funds quickly
  • Don’t own a home or don’t have enough equity to take advantage of it
  • Own a home in an area where the home values are declining or remain stagnant
  • Need a small loan amount
  • Don’t want to put your home at risk
  • Want to bypass the extensive paperwork needed to qualify
  • Plan to use your home equity for another reason down the road

Home equity loans are best for you if you:

  • Have significant equity in your home
  • Don’t need your funds immediately
  • Would prefer to stretch your loan payments over a longer period
  • Are seeking a higher loan amount
  • Want a lower interest rate than a personal loan
  • Plan to use your funds for home improvements and take advantage of possible tax deductions 

How Home Equity Loan vs. Personal Loan Applications Differ

As these loans are different, so is the loan application process. Here’s a brief difference between the two. 

Home equity loan

To secure a home equity loan, you will go through a process similar to when you secure your initial mortgage. Your home is used as collateral, and you will be responsible for additional fees such as a loan origination fee, appraisal fee, title report, notary, and more. 

Personal loan

There is a more straightforward process when securing a personal loan. The application requires fewer steps, and the approval is quicker.  Also, you won’t need to pay as many fees, but might be responsible for an origination fee or prepayment penalty, depending on your lender. 

What’s Each Loan Typically Used For?

While each loan can be used for any reason, there are some recommendations for use related to each. 

Home equity loan

  • Substantial home improvements so the interest paid on the loan can be tax-deductible
  • Consolidate large amounts of high-interest debt
  • Cover college tuition costs
  • Pay for significant emergency expenses

Personal loan

  • Smaller home improvements 

  • Take an inexpensive vacation

  • Cover smaller emergency expenses

You can’t go wrong with a home equity loan or personal loan, but you must consider which will best suit your financial needs at the moment and in the future. 

Learn more about the difference between a home equity line of credit (HELOC) and a home equity loan.


HELOC vs. Home Equity Loan