Home Equity Loan
A home equity loan is a fixed-rate, lump-sum second mortgage that allows homeowners to borrow against the equity in their property. The borrower receives the full loan amount at closing and repays it in equal monthly installments over a set term.
What This Means
Structure and Terms
Home equity loans provide a single disbursement at closing, distinguishing them from the revolving structure of a HELOC. The interest rate is typically fixed for the life of the loan, giving borrowers predictable monthly payments. Loan terms commonly range from . Because the home equity loan is subordinate to the primary mortgage, it is classified as a second lien, and interest rates are generally higher than first mortgage rates to compensate for the increased risk to the lender.
Borrowing Limits and Qualification
Lenders calculate the maximum loan amount based on the home's current appraised value, the outstanding first mortgage balance, and the borrower's creditworthiness. Most lenders cap the combined loan-to-value (CLTV) ratio at . Qualification standards typically require a credit score of or above, a manageable debt-to-income ratio, and sufficient verifiable income. An appraisal is usually required to establish the property's current market value.
When a Home Equity Loan Is Appropriate
Home equity loans are well-suited for borrowers who need a specific amount for a defined purpose, such as a major home renovation, debt consolidation at a lower rate, or a large planned expense. The fixed-rate structure provides certainty that a HELOC's variable rate does not. Borrowers should be aware that the home secures the debt; failure to repay can lead to foreclosure regardless of how much equity remains.