Home equity loans can be a great way to access some of the equity you hold in your home, but they may not be suitable for all circumstances. With this kind of loan, you put up your house as collateral, which gives your lender rights to your home if you fail to make the loan repayments. This makes home equity loans a low-risk proposition for lenders, who can consequently offer extremely competitive interest rates—usually close to those of a regular mortgage.
Home equity loans have some disadvantages, however, even aside from the risk of losing your home. One is that setting up the lien on your home and offering a guaranteed interest rate for years to come makes lenders wary of issuing small amounts through home equity loans. Many lenders have a minimum amount they are willing to consider for this type of loan.
In this article, we’ll explain why and give you some alternatives to a home equity loan.
- Most lenders have minimum amounts they are willing to lend via home equity loans.
- The interest rates on these loans are generally quite low and so lenders may not make a profit on small loans that the borrower pays back almost immediately.
- Most lenders have a minimum of $35,000 for a home equity loan, though some will go as low as $10,000.
- This minimum—along with early repayment penalties and potential up-front interest—makes home equity loans unsuitable for small loans. If you need a smaller loan than the minimum home equity loan available, you can consider borrowing via a credit card or applying for a personal loan.
Minimum Amounts for Home Equity Loans?
Each lender sets its own eligibility requirements and processes when it comes to home equity loans. However, there are some fairly standard features across the industry. One is that you own a significant amount of equity in your home—normally, at least 15% of its value. Second, you may well have to pay many of the same closing costs associated with a first mortgage, such as loan-processing fees, origination fees, appraisal fees, and recording fees. Though these fees vary between lenders, they could total a few thousand dollars.
These two factors combined make home equity lenders wary of issuing small home equity loans. Among major banks, the minimum as of April 2022 was $10,000, with a maximum combined loan-to-value of 80%. But some lenders expect a minimum loan of $35,000 and even lower loan-to-value ratios.
This minimum has two effects. One is that it makes it difficult for some homeowners—and particularly those who don’t yet own significant equity—to access a home equity loan. The other is that some borrowers who only need a small injection of cash end up borrowing far more than they need to against the value of their home. And since some home equity loans also have early repayment penalties or up-front interest payments, it may not be possible to take a larger loan and pay the unneeded portion back.
Some home equity loans have early repayment penalties—fees that you must pay if you repay the loan before it is due. These fees impose a minimum cost for a home equity loan, even if you only need to use a portion of the money.
Alternatives to a Home Equity Loan
The minimum size for home equity loans can make them unsuitable for short-term borrowing for small purchases or projects. You will pay interest on a home equity loan and the minimum size of these loans effectively imposes a minimum amount of interest as well.
There are a few alternatives to home equity loans. If you need access to credit over the very short term (a few months maximum), you can use a credit card. However, the interest rates on credit cards are so high that this can be an expensive way to borrow, no matter how little you do so.
Another option is a personal loan. Though personal loans may look similar to a home equity loan, there are some important differences between these types of borrowing. Personal loans are unsecured, meaning that the loan isn't based on collateral, like a home. Some lenders offer personal loans without origination costs, but even if they do, they won't be as much as closing costs on home equity loans, which can cost several thousand dollars for larger loans. You’ll also be able to arrange a personal loan much more quickly than a home equity loan.
Is There a Minimum Amount for a Home Equity Loan?
Yes. Some lenders set a minimum of $35,000; others can go as low as $10,000.
Can I Pay off a Home Equity Loan Early?
You can but might have to pay fees. Some home equity loans have early repayment penalties or up-front interest payments that set an effective minimum cost for the loan, even if you only need to use a portion of it.
Are There Alternatives to a Home Equity Loan?
Yes. If you need to borrow a small amount for a very short period, you could consider using a credit card. Alternatively, you can apply for a personal loan, which is less risky than a home equity loan and much more flexible.
The Bottom Line
Most lenders have minimum amounts they are willing to lend via home equity loans. The interest rates on these loans are generally quite low and so lenders may not make a profit on small loans that the borrower pays back almost immediately. Most lenders have a minimum of $35,000 for a home equity loan, though some will go as low as $10,000.
This minimum—along with early repayment penalties and potential up-front interest—makes home equity loans unsuitable for small loans. If you need a smaller loan than the minimum home equity loan available, you can consider borrowing via a credit card or applying for a personal loan.