How Does a Home Equity Loan Work?
Updated: January 27 2026 • 6 min read
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<p><span>Bennett Leckrone is the editorial manager and an analyst for Lower. He specializes in making complicated mortgage topics accessible for consumers. That includes both in-depth product guides and in-depth analysis on what economic moves mean for homebuyers and refinancers.</span></p>
<p><span>He was previously a business reporter with a focus on higher education and fintech at BestColleges. In that role, he reported on the development of fintech and AI curriculum, as well as the rapidly changing nature of finance education. He also wrote guides to help business students navigate AI and online education.</span></p>
<p><span>He also reported on state politics at Maryland Matters, with a focus on how policy affected people and businesses. He holds a bachelor of science in journalism degree from Ohio University.</span></p>
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REVIEWER: (SizeLimitingPyMap: {bio=<p><span>Neel Patel is a mortgage industry professional with more than a decade of hands-on experience across loan origination, customer experience, sales operations, and strategy. He has worked at every stage of the mortgage lifecycle, from advising individual borrowers to leading teams of loan officers. </span></p>
<p><span>As an expert reviewer, Neel evaluates mortgage and personal finance content for accuracy, clarity, and real-world applicability. He specializes in ensuring information reflects how lending actually works in practice so consumers can make confident, informed decisions.</span></p>, hs_child_table_id=0, hs_created_at=1770998587713, hs_created_by_user_id=85123122, hs_deleted_at=0, hs_id=207521716567, hs_initial_published_at=1770998795717, hs_is_edited=false, hs_name=Neel Patel, hs_path=neel-patel, hs_published_at=1770998795717, hs_updated_at=1770998733653, hs_updated_by_user_id=85123122, name_first_last=Neel Patel, profile_picture={url=https://19577492.fs1.hubspotusercontent-na1.net/hubfs/19577492/Neel%20Patel%20Cropped%204.jpg, width=1638, height=2048, altText=Neel Patel, fileId=207528140173, type=image}, tags=[{id=2, name=reviewer, label=Reviewer, isHubspotDefined=false, labelTranslations={}, type=option, createdAt=1770043811028, createdByUserId=83124684, createdBy={id=83124684, email=shilyard@lower.com, firstName=Shawn, lastName=Hilyard}, updatedAt=1770043811028, updatedByUserId=83124684, updatedBy={id=83124684, email=shilyard@lower.com, firstName=Shawn, lastName=Hilyard}, order=1}]})
Written by
Bennett Leckrone
Writer / Reviewer / Expert
Reviewed by
Neel Patel
Reviewer
Key Takeaways
- A home equity loan provides a lump sum backed by your home’s equity.
- Home equity loans generally have fixed rates. That means your payment will be predictable throughout the loan term, commonly 5 to 15 years.
- Home equity loans are popular options for major expenses and debt consolidation, and usually have lower rates than unsecured loans.
Tap into more home equity than almost any other lender.
Homeowners are sitting on significant amounts of equity, and a home equity loan can put that equity to work.
The average homeowner with a mortgage now holds roughly $300,000 in equity, according to the Mortgage Reports. A home equity loan lets you tap into that equity as a lump sum, fixed-interest loan.
It’s a popular option for debt consolidation and large, one-time expenses, and it works in a relatively straightforward way.
What is a Home Equity Loan?
A home equity loan is a second mortgage that lets you borrow a lump sum against the portion of your home you’ve paid off.
It’s typically a fixed-rate, closed-end term loan secured by your property, with repayment over 5 to 30 years. Because payments are fixed and the funding is delivered all at once, it’s a popular choice for major projects, debt consolidation, or expenses where predictability matters.
You may also see these called closed-end or term loans. Compared with other borrowing types, the structure is straightforward and often features clear, amortizing payments over a set schedule, which many borrowers find easier to budget for, as outlined in typical home equity loan structure references from major lenders.
How is Home Equity Calculated?
Home equity equals the current market value of your house minus what you still owe on your mortgage.
Two related metrics matter for approval and loan size:
- Loan-to-value ratio (LTV): Your existing mortgage balance divided by your home’s value.
- Combined loan-to-value (CLTV): Your total mortgage debt after adding the new loan, divided by your home’s value. Lenders cap CLTV to limit risk. Common caps range between 80% and 85%, but some lenders, including Lower, go higher
You can use our home equity calculator below to get an idea of what your equity might be.
Home Equity Calculator
Estimate your equity today and model how it could change over time based on mortgage payoff and optional home appreciation.
Your Results
| Year | Home value | Mortgage | Equity | LTV |
|---|
| Month | Payment | Principal | Interest | Balance |
|---|
This tool estimates equity today and projects equity over time using two building blocks: home value and mortgage balance.
1) Equity
Equity = Home value − Mortgage balance
2) Home value over time (optional appreciation)
If “Include annual home appreciation” is checked, the calculator compounds home value each year:
Future home value = Today’s value × (1 + a)y
where a is the annual appreciation rate (as a decimal) and y is years in the future. If appreciation is unchecked, the tool uses a = 0.
3) Mortgage balance over time (amortization)
The mortgage projection assumes a standard fixed-rate loan on your current remaining balance with years remaining.
Monthly payment = P × r × (1 + r)n / ((1 + r)n − 1)
where P is today’s mortgage balance, r is the monthly interest rate (APR/12), and n is the number of remaining payments (years remaining × 12).
Each month, interest is calculated on the remaining balance and the rest of the payment reduces principal:
Interest = Balance × r
Principal = Payment − Interest
New balance = Balance − Principal
4) What the “Key years” table shows
For Year 0, a midpoint year, and the final year, the calculator: (a) estimates home value, (b) estimates remaining mortgage balance after y years, then (c) computes equity and loan-to-value (LTV).
LTV = Mortgage balance / Home value
Put your equity to work.
How Does a Home Equity Loan Work?
Here’s the typical path from application to repayment for a home equity loan:
- Application: You complete a digital application, authorize a credit pull, and upload income and property documents.
- Appraisal: The lender verifies your home’s value via an appraisal or valuation model, which drives LTV/CLTV and your maximum loan amount.
- Underwriting and approval: Your credit, income, debts, and equity are reviewed. You’ll receive a conditional approval detailing terms and closing needs.
- Closing and funding: You sign final documents, often electronically. Funds are disbursed as a one-time lump sum to your bank account.
- Repayment: You make fixed monthly payments at a fixed interest rate for a set term, commonly between 5 and 30 years. Payments reduce both interest and principal on an amortization schedule.
Because the rate and payment are fixed, budgeting is more predictable than with variable-rate products. As a secured loan, your home acts as collateral.
How to Qualify for a Home Equity Loan
Lenders evaluate both the property and your finances to see if you qualify for a home equity loan. Expect these key factors:
- Minimum equity: You’ll often need to retain at least 20% equity after closing, because CLTV is often capped around 80%.
- Income and employment: Lenders want to see steady, documentable income to support payments.
- Debt-to-income (DTI) ratio: Your monthly debt payments divided by your pre-tax income; lower is better.
- Credit score: Good credit generally improves approval odds and lowers your rate.
- Appraisal: A satisfactory valuation to confirm your home’s current market value.
You can get a quick idea of your debt-to-income ratio using our calculator below.
Debt-to-Income (DTI) Ratio Calculator
Compare your total monthly debt payments to your annual income (before taxes) and see how your DTI stacks up.
How this calculator works
Debt-to-income ratio (DTI) compares your total monthly debt payments to your gross monthly income.
This calculator converts annual income into monthly income:
Gross monthly income = Annual income ÷ 12
Then it computes:
DTI (%) = (Total monthly debt ÷ Gross monthly income) × 100
DTI categories used here: Good (35% or less), Acceptable (36% to 43%), Need Work (above 43%).
Your results
Connect with an expert o see what you qualify for.
Home Equity Loan LTV Requirements
Loan-to-value ratio (LTV) compares your loan amount to your home’s value. Combined LTV (CLTV) includes all mortgages after your new loan. Lenders use these to cap your borrowing.
Lenders typically allow you to borrow up to 80% of your home’s value when combined with your existing mortgage balance, though some allow higher caps depending on credit, property, and market factors.
Here are some sample borrowing scenarios:
|
Home value |
Current mortgage |
Max LTV allowed |
Max total loans allowed |
Max potential home equity loan |
|
$400,000 |
$240,000 |
80% |
$320,000 |
$80,000 |
|
$600,000 |
$300,000 |
80% |
$480,000 |
$180,000 |
|
$500,000 |
$350,000 |
85% |
$425,000 |
$75,000 |
Home Equity Loan Costs
Beyond interest, expect the following fees:
- Appraisal/valuation fee
- Origination or underwriting fee
- Title search and recording fees
- Closing costs, similar to a first mortgage closing
- Potential annual or early-closure fees, depending on the lender
Your APR (annual percentage rate) reflects the total yearly cost of borrowing, including interest and most fees, which is the best apples-to-apples way to compare offers.
The time from application to funding varies based on underwriting and your personal situation. Some loans are funded in days, whereas others can take months.
How Home Equity Loans Differ from HELOCs
A HELOC (home equity line of credit) is another way to tap into your home’s equity, but the way it works differs significantly from a home equity loan. A HELOC is a revolving credit line secured by your home, generally with a variable interest rate and a draw period followed by repayment.
|
Feature |
Home equity loan |
HELOC |
|
Disbursement |
Lump sum at closing |
Draw as needed up to a limit |
|
Rate type |
Generally fixed |
Generally variable, although some lenders may offer fixed-rate draws |
|
Payment |
Equal, amortizing payments from day one |
Interest-only during the draw period, principal and interest in repayment |
|
Best for |
Planned, one-time expenses |
Ongoing or uncertain expenses over time |
|
Predictability |
High |
Moderate to low, because your rate and payment can change |
Many borrowers prefer the predictability of a home equity loan, while others choose a HELOC for flexibility.
The Bottom Line
A home equity loan provides a lump sum backed by your home’s equity. Terms vary, with 5 and 15 years both being common. Home equity loans generally come with a fixed rate, meaning payments are predictable throughout the life of the loan. They generally have lower rates than unsecured loans, but also have higher risk since your home is collateral.
Frequently asked questions about home equity loans
How much can I borrow with a home equity loan?
You can typically borrow up to about 80% of your home’s value minus your remaining mortgage balance, subject to credit, income, and appraisal.
What are the main requirements to qualify?
Most lenders look for at least 20% equity after closing, a solid credit score, manageable DTI, documented income, and a successful appraisal.
How does the application process work?
You apply, complete a valuation, and go through underwriting; after approval and closing, funds are disbursed as a lump sum and you begin fixed monthly payments.
What can the funds from a home equity loan be used for?
They’re broadly flexible. Common uses include renovations, debt consolidation, education, and major purchases.
How do home equity loans compare to other borrowing options?
They usually offer lower, fixed rates and predictable payments compared to other financing sources, making them well-suited for large, planned expenses.