Home Equity Loan Explained: Your Complete Guide to Fixed Rate Second Mortgages (2026)
A home equity loan (HELOAN) provides a lump sum of cash at a fixed interest rate, secured by your home's equity. With predictable monthly payments and protection from rate increases, home equity loans are ideal for homeowners who know exactly how much they need and want payment certainty. Here's everything you need to know.
Home Equity Loan Quick Facts
- Loan Type: Lump sum, fixed rate
- Typical Terms: 5-30 years
- Max LTV: Usually 80-85%
- Min Credit Score: 620+ (680+ preferred)
- Best For: One-time large expenses
- Closing Costs: 2-5% of loan amount
- Tax Deductible: If used for home improvement
- Your Home: Used as collateral
What Is a Home Equity Loan?
A home equity loan is a type of second mortgage that allows you to borrow against the equity you've built in your home. Unlike your first mortgage which helped you buy the home, a home equity loan lets you tap into the value you've accumulated through payments and appreciation.
The defining characteristic of a home equity loan is its fixed structure: you receive a lump sum at closing, pay a fixed interest rate, and make the same monthly payment for the entire loan term. This predictability makes budgeting straightforward and protects you from rising interest rates.
Home Equity Loan vs. First Mortgage
Your first mortgage (the one you used to buy your home) is in "first lien position"— if you default, it gets paid first. A home equity loan is in "second lien position" (hence "second mortgage"), meaning it has higher risk for lenders, which typically results in slightly higher interest rates than first mortgages.
How Does a Home Equity Loan Work?
The home equity loan process works similarly to getting your original mortgage:
- Application: You apply with income, asset, and property information, just like a traditional mortgage
- Appraisal: The lender orders an appraisal to determine current home value
- Underwriting: Lender verifies your income, credit, and equity position
- Approval and closing: If approved, you sign documents and receive funds as a lump sum
- Repayment: You make fixed monthly payments over the loan term (5-30 years)
Understanding Loan-to-Value (LTV)
Lenders use combined loan-to-value (CLTV) to determine how much you can borrow. CLTV includes both your first mortgage and the new home equity loan.
CLTV Calculation Example
- Home Value: $600,000
- First Mortgage Balance: $350,000
- Maximum CLTV Allowed: 80%
- Maximum Total Debt: $480,000 ($600,000 × 80%)
- Maximum Home Equity Loan: $130,000 ($480,000 - $350,000)
Some lenders allow up to 85% or 90% CLTV, which would increase the available loan amount.
Home Equity Loan Requirements
To qualify for a home equity loan, you'll typically need to meet these criteria:
Equity Requirements
- At least 15-20% equity in your home after the loan
- Combined loan-to-value (CLTV) of 80-85% or less
- Property must appraise at or above expected value
Credit Requirements
- Minimum credit score of 620 (680+ for best rates)
- No recent bankruptcies (typically 2-4 years depending on type)
- No recent foreclosures
- Current on existing mortgage (no late payments in past 12 months)
Income and Debt Requirements
- Debt-to-income ratio (DTI) below 43% (some programs allow higher)
- Stable employment history (typically 2 years)
- Verifiable income through tax returns, pay stubs, or bank statements
Home Equity Loan Costs and Fees
Home equity loans have closing costs similar to traditional mortgages, though often lower:
| Fee Type | Typical Cost | Notes |
|---|---|---|
| Appraisal | $300-$600 | Required to determine home value |
| Origination Fee | 0-1% of loan | Some lenders waive this |
| Title Search/Insurance | $150-$400 | Confirms clear title |
| Recording Fees | $50-$150 | County filing fees |
| Attorney Fees | $200-$500 | Required in some states |
| Total Typical Range | 2-5% of loan | Or $2,000-$5,000 on $100K loan |
No-Closing-Cost Options
Some lenders offer "no closing cost" home equity loans. The costs aren't eliminated— they're rolled into a slightly higher interest rate. This can make sense if you plan to pay off the loan quickly, but costs more over longer terms.
Advantages of Home Equity Loans
Fixed Interest Rate
Your rate never changes, regardless of market conditions. Protection from rising rates provides long-term budget certainty.
Predictable Payments
Same payment amount every month for the life of the loan. Easy to budget and plan around.
Lump Sum Disbursement
Receive the full amount at closing—ideal for large, immediate expenses like renovations or debt consolidation.
Lower Rates Than Unsecured Debt
Because your home secures the loan, rates are typically much lower than credit cards or personal loans.
Potential Tax Benefits
Interest may be tax-deductible if used for home improvements (consult a tax advisor).
Disadvantages and Risks
Your Home Is Collateral
Failure to repay could result in foreclosure. Only borrow what you can comfortably afford to repay.
Reduces Home Equity
Borrowing against equity means less cushion if home values decline and less profit if you sell.
Closing Costs
2-5% in fees means you don't receive the full loan amount. Factor this into your planning.
Less Flexibility Than HELOC
You get one lump sum—if you need more later, you'd need to refinance or apply for a new loan.
Best Uses for Home Equity Loans
Home equity loans work best when you have a specific, defined expense:
- Home renovations: Kitchen remodel, room addition, roof replacement— especially valuable since interest may be tax-deductible
- Debt consolidation: Pay off high-interest credit cards with a lower fixed rate (just don't run up the cards again)
- Major purchases: Vehicle, wedding, or other large one-time expenses
- Education expenses: College tuition when federal aid falls short
- Emergency fund: Medical expenses or unexpected large repairs
When a Home Equity Loan Makes the Most Sense
A home equity loan is typically the right choice when:
- ✓ You know exactly how much you need
- ✓ You want predictable, fixed payments
- ✓ You're concerned about rising interest rates
- ✓ You prefer having a definite payoff date
- ✓ You won't need to borrow more over time
Home Equity Loan vs. HELOC: Quick Comparison
| Feature | Home Equity Loan | HELOC |
|---|---|---|
| Disbursement | Lump sum at closing | Draw as needed |
| Interest Rate | Fixed | Variable (usually) |
| Monthly Payment | Fixed amount | Varies with balance/rate |
| Flexibility | Less—one-time funding | More—ongoing access |
| Best For | Defined, one-time expenses | Ongoing or uncertain needs |
Frequently Asked Questions About Home Equity Loans
What is a home equity loan?
A home equity loan (HELOAN) is a second mortgage that lets you borrow against your home's equity in a lump sum with a fixed interest rate and fixed monthly payments. Unlike a HELOC's variable rate and revolving credit, a home equity loan provides predictable payments over a set term, typically 5-30 years.
What is the difference between a home equity loan and a HELOC?
A home equity loan provides a one-time lump sum with a fixed rate and fixed payments. A HELOC is a revolving credit line with a variable rate where you draw funds as needed. Home equity loans are better for one-time expenses with predictable payments, while HELOCs offer flexibility for ongoing or uncertain costs.
How much can I borrow with a home equity loan?
Most lenders allow you to borrow up to 80-85% of your home's value minus your existing mortgage balance. For example, if your home is worth $600,000 and you owe $300,000, you could potentially borrow up to $180,000-$210,000 (at 80-85% combined loan-to-value).
What are the requirements for a home equity loan?
Requirements typically include at least 15-20% equity in your home, credit score of 620+ (680+ for best rates), debt-to-income ratio below 43%, stable income and employment, and being current on your existing mortgage with no recent late payments.
Are home equity loan payments tax deductible?
Home equity loan interest may be tax deductible if the funds are used to "buy, build, or substantially improve" the home securing the loan. Interest on funds used for other purposes (debt consolidation, education, etc.) is generally not deductible. Consult a tax professional for your specific situation.
What are home equity loan closing costs?
Closing costs typically range from 2-5% of the loan amount and may include appraisal fees ($300-$600), origination fees (0-1%), title search and insurance, recording fees, and attorney fees in some states. Some lenders offer no-closing-cost options with slightly higher rates.
When should I choose a home equity loan over a HELOC?
Choose a home equity loan when you need the full amount upfront, want predictable fixed payments for budgeting, prefer protection from rising interest rates, are funding a specific one-time expense (like a major renovation), or want the discipline of a set payoff timeline.
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