Home Equity Loan

A home equity loan is a lump-sum loan secured by the equity in your home, advanced once and repaid on a fixed schedule of principal and interest. Because it is secured by real property, a home equity loan can typically carry a lower interest rate than an unsecured personal loan or credit card, and it is often structured much like a mortgage, with a set term and amortization.

How a home equity loan uses your equity

Your home equity is the difference between what your property is worth and what you still owe on any mortgages registered against it. A home equity loan lets you borrow against a portion of that equity without disturbing your existing first mortgage. The lender registers a new charge on title — commonly a second mortgage — that ranks behind the first lender in priority.

Lenders assess the combined loan-to-value ratio — all debt secured by the home divided by its appraised value — when deciding how much they will advance. Federally regulated lenders also apply an affordability assessment, and in some cases a stress test, to confirm you can carry the new payment alongside your existing debts. Limits vary by lender and product, so confirm the current figure with the lender.

Home equity loan vs. HELOC vs. refinance

These three options all convert equity into cash, but they behave differently:

• Home equity loan — a one-time lump sum with a fixed payment schedule; predictable and suited to a known, one-off cost.
• Home equity line of credit — a revolving limit you can draw from, repay, and reuse; the rate is usually variable. See HELOC.
• Refinance — replaces your existing mortgage with a larger one, which may mean breaking your current term.

For a homeowner funding a single planned expense, a lump-sum home equity loan offers a defined payoff date, while a HELOC suits ongoing or uncertain costs. A side-by-side comparison can help clarify which structure fits.

What to watch for

Because the loan is secured against your home, missed payments can lead to serious consequences, up to and including a power of sale or foreclosure. Adding a second payment also raises your total debt service ratio, which lenders review at renewal or when you apply for new credit. Some home equity loans carry prepayment penalties or discharge fees, so read the terms before signing.

If the goal is to consolidate higher-interest debt, compare the blended cost of the new loan against the debts it replaces, and check whether breaking an existing mortgage would trigger an interest rate differential penalty.