How long is a typical home equity loan term?

Depending on the type of home equity loan you choose, there may be different loan term options available. Your choice of home equity loan could make a big difference to your financial future, as well as the overall cost of your home equity loan.

The term on your home equity loan may depend on the method used to access your home equity.

Line of Credit

This financial product works similarly to a credit card, with the maximum credit limit often based upon the usable equity in your property. With a line of credit, you can borrow up to your maximum approved limit, and make flexible repayments when you choose. You’ll only be charged interest on the amount you’ve currently borrowed, and the interest rates are often lower than those charged by many credit card providers.

As this type of home equity loan offers a flexible line of credit, there may not be a set term length to repay what you’ve borrowed. That said, much like a credit card, if you don’t keep up with your repayments you could quickly find the interest charges maxing out your available limit, potentially leaving you in financial stress.

Lump Sum

Accessing your home equity as a lump sum could mean borrowing a separate sum similar to a personal loan, or “topping up” your existing mortgage by borrowing more funds when you refinance.

If your home equity loan is handled separately from your mortgage, it may have a loan term of between 5 and 15 years. There are also shorter-term home equity loans that could run for up to three years. This allows you to be confident that your loan can be repaid within the foreseeable future, and calculate the maximum interest you’ll be charged on your home equity loan.

If your home equity loan is added to your existing mortgage, it will share its interest rate and remaining loan term, which is often measured in decades. This could make your home equity loan relatively simple to manage as you can keep making the same kind of repayments as you were already managing. However, topping up your home loan like this mean it will likely take longer for you to pay off your mortgage, which may cost you more in total interest on your property over the long term.

Reverse Mortgage

Typically used by retirees who own their homes outright, a reverse mortgage allows the borrower to access the equity in their property as either a lump sum or an income stream, which could help to supplement a pension or other income sources to help fund your retirement lifestyle.

You’ll typically have the flexibility to make repayments on a reverse mortgage when you choose, and only be charged interest on the amount that’s been borrowed, similarly to a line of credit. Regulations are in place to ensure that the maximum amount you’ll owe on a reverse mortgage will always be less than the value of the property.

There is typically no set repayment term on a reverse mortgage. That said, the loan will typically need to be repaid when you move into aged care, pass away, or when your house is sold.

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