Home equity loans vs. personal loans: Which is right for you?

There’s a major expense on the horizon, and you’re ready to tackle it. But should you dip into your home’s equity or go with a personal loan? 

Both financing options can get you the money you need, but the details matter. Learn the key differences between home equity loans versus personal loans, when one might be a better choice, and how to decide which option best fits your needs.

Home equity loans vs. personal loans: Which suits you better?

Home equity loans and personal loans both give you a lump sum of cash. You pay it back in monthly installments with interest.

The key difference is that personal loans don’t require collateral, while home equity loans are secured by the equity you’ve built up in your home. Lenders calculate equity by taking the difference between your home’s value and what you still owe on your mortgage.

Because there’s collateral involved, lenders typically offer lower interest rates and higher loan amounts for home equity loans. At the same time, using your home as equity could be risky, since it’s on the line if you can’t repay. And unlike refinancing, where you replace your original mortgage with another one, a home equity loan is a type of second mortgage, since you still to manage the original loan.

Personal loans are unsecured. That means you don’t have to put up any collateral, which makes the application faster and less complicated. But interest rates tend to be higher because the lender is taking on more risk, and loan amounts are generally smaller.

Ultimately, which choice is better depends on your personal financial situation. If you have a lot of equity built up and are comfortable using your home as collateral, a home equity loan could get you more favorable terms. 

If you decide to tap into your equity, Better makes it simple. You can get pre-approved for a home equity line of credit in as little as three minutes and access your cash in just 7 days. Plus, Better’s online pre-approval won’t impact your credit. 

...in as little as 3 minutes – no credit impact

Home equity loans vs. personal loans: The basics

This table outlines the key differences between home equity loans and personal loans to help you compare before we dive deeper:

Feature	Home Equity Loan	Personal Loan
Collateral required	Yes — secured by your home	No — unsecured
Interest rate	Usually lower (fixed)	Usually higher (fixed)
Loan amount	Based on available home equity (often up to 85–90%)	Based on credit score, income, and debt-to-income ratio
Disbursement	Lump-sum payment	Lump-sum payment
Repayment term	Fixed term (typically 5–30 years)	Fixed term (typically 1–7 years)
Monthly payments	Fixed monthly payments	Fixed monthly payments
Use of funds	Flexible: Home improvement, debt consolidation, large expenses	Flexible: Smaller or urgent expenses, like medical bills or credit card debt
Tax benefits	Interest may be tax-deductible if used for home improvements	No tax benefits
Fees and costs	May include closing costs, appraisal, or origination fees	May include origination fees
Approval process	Slower — requires home appraisal and underwriting	Faster — minimal documentation and no appraisal
Risk	Home is at risk if you default	No risk to home, but missed payments affect credit

Home equity loans

Home equity loans let homeowners borrow against the equity they’ve built up in their property. They usually come in a lump sum with a fixed interest rate and a predictable payment schedule.

You can use the funds from a home equity loan for anything you want, but some common use cases are home renovations, debt consolidation, or paying for college tuition.

Like any loan, home equity loans have their own set of benefits and risks:

Benefits of a home equity loan

— Lower interest rates: Because the loan is secured by your home, lenders generally give better interest rates than they do for unsecured options.

— Bigger loan amounts: You can typically borrow 85–90% of your home’s equity, making it easier to fund major expenses.

— Fixed interest rates: Monthly payments stay the same, which simplifies planning and budgeting.

— Potentially tax-deductible interest: If you use the loan for qualifying home improvements, the interest you pay may be tax-deductible.

— Long repayment window: With loan terms often stretching 10–30 years, you’ll likely have lower monthly payments compared to shorter-term loans.

Risks of a home equity loan

— Secured by your home: Your home is on the line if you fall behind on payments.

— Closing costs: You may face upfront costs such as appraisal fees, origination charges, or title services. With Better, you can roll closing costs into the loan and pay nothing out of pocket to start.

— Long-term debt: A longer repayment term means you might pay more interest in the long run.

— Negative equity risk: If your home’s value drops significantly, you could end up owing more than it’s worth.

— Second mortgage pressure: Taking out a home equity loan on top of your mortgage means managing two debts, which is why you should use the funds for appropriate expenses. 

Personal loans

Since personal loans don’t require collateral, lenders base their decision on your credit score, income, and debt-to-income ratio. If you get approved, you get a lump sum of cash, just like with a home equity loan.

Here are some of the key benefits and risks of taking out a personal loan:

Benefits of a personal loan

— No collateral: You don’t have to use your home or other assets to secure the loan, which reduces your financial risk.

— Fixed payments: Like home equity loans, personal loans have fixed interest rates and terms, so you don’t have to worry about rate increases.

— Fast approval and funding: What’s the benefit of obtaining a personal loan that stands out most? If you’re approved, you could receive your funds in just a few days.

Risks of a personal loan

— Higher interest rates: Since there’s no collateral, lenders charge higher rates, especially if your credit score isn’t strong.

— Smaller loan amounts: Most personal loans offer lower amounts than home equity loans, which may not be enough for bigger projects.

— Shorter repayment periods: With terms usually between 1–7 years, your monthly payments might be higher.

— Not ideal for expenses: If you’re financing a major project, like a home renovation, personal loans may not provide enough funding or could lead to higher monthly payments.

How is the application process different for home equity loans vs. personal loans?

Home equity loans and personal loans have similar requirements:

How to get a home equity loan

There are a few requirements you and your property need to satisfy to get a home equity loan. Since this type of loan uses your home as collateral, lenders look closely at both your property and your credit profile. Requirements often include:

— At least 15%–20% equity in your home

— A credit score of 620 or higher

— A debt-to-income ratio below 43%

— Documentation showing your income, assets, and current debts

The approval process usually includes a home appraisal to verify your property’s value and can take a few weeks from application to funding. With Better, you may be able to use a AVM, which cuts the time and cost of getting your property appraised. 

How to get a personal loan

Many of the qualification requirements for getting a personal loan are the same as for home equity loans. Whether it’s a personal loan or a home equity loan, you need a strong credit profile and a steady source of income. Because there’s no asset backing the loan, borrowers with lower debt and higher credit scores tend to land the best deals.

Find the Better loan option for you

Choosing between a personal loan and a home equity loan comes down to what fits your budget, timeline, and goals. Whether it’s a stable home equity loan or a flexible HELOC, your home’s equity gives you borrowing power that’s more affordable than credit cards or unsecured loans.

Better makes accessing your equity easy. It only takes three minutes to see which home equity options you’re pre-approved for — and our tech will figure out which options can help you meet your goals, with no pressure and no surprises.

...in as little as 3 minutes – no credit impact