A home equity loan, often referred to as a “second mortgage,” lets you borrow a lump sum against the equity built in your home — the difference between your home’s current market value and the outstanding balance on your primary mortgage. Because it’s secured by your property, lenders typically offer lower interest rates and longer repayment periods, ranging from 5 to 30 years. However, failure to repay could result in foreclosure, risking your home. For more detail on interest deductions, see Home Equity Loan Interest Deduction.
In contrast, a personal loan is usually an unsecured loan based on your credit score, income, and debt levels. It doesn’t require collateral, so lenders charge higher interest rates and generally offer shorter repayment terms, often between 2 to 7 years. Personal loans have faster approval processes and funding timelines, sometimes within a day. Learn more about the approval process at Personal Loan Underwriting.
| Feature | Home Equity Loan | Personal Loan |
|---|---|---|
| Collateral | Required — your home | Not required — usually unsecured |
| Interest Rates | Lower — secured loan | Higher — unsecured loan |
| Loan Amount | Typically higher — based on home equity | Usually lower — based on creditworthiness |
| Repayment Term | Longer — 5 to 30 years | Shorter — 2 to 7 years |
| Approval Process | Slower — requires home appraisal and title check | Faster — often same-day to a few days |
| Tax Deductibility of Interest | Possible if funds used for home improvements | Generally no tax deduction unless business use |
| Primary Risk | Foreclosure risk | Credit damage, collections, lawsuits |
When to Choose a Home Equity Loan
- You need a large sum for home improvement projects that increase property value.
- Consolidating high-interest debts with potentially lower rates (note this converts unsecured debt into secured debt).
- Accessing funds above $50,000 at competitive rates.
When a Personal Loan Is Better
- You require funds quickly for emergencies or small expenses.
- You don’t own a home or lack sufficient equity.
- You prefer not to risk your home as collateral.
- Loan amount needed is relatively small.
Note on HELOCs
A Home Equity Line of Credit (HELOC) works similarly but offers a revolving credit line instead of a lump sum, providing flexibility. See Home Equity Line of Credit (HELOC) for details.
Avoid These Common Mistakes
- Ignoring closing costs on home equity loans, which can add 2-5% of the loan amount.
- Using home equity loans for non-essential spending, risking your home.
- Not comparing offers from multiple lenders to find the best terms.
Frequently Asked Questions
Can I get a personal loan if I already have a mortgage? Yes, personal loans consider your overall debt but don’t require homeownership.
Is interest on a home equity loan always tax-deductible? No. Only interest used for buying, building, or substantially improving your home qualifies, per IRS rules (see IRS Publication 936).
Which loan is easier to qualify for? Qualification depends on your credit score and home equity. Personal loans usually have simpler and quicker application processes.
For more on loan types, visit our detailed articles on Home Equity Loans and Personal Loans.