What is a Home Equity Loan?
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 is a second mortgage that lets you borrow a lump sum against your home’s equity.
- Home equity loans usually have a fixed rate, meaning payments are predictable throughout the life of the loan.
- Home equity loans often have lower rates compared to unsecured options like credit cards.
Tap into more home equity than almost any other lender.
Americans are sitting on unprecedented equity.
Borrowers total $17.1 trillion in home equity as of Q3 2025, according to the Mortgage Reports. That comes after a rapid rise in equity after the pandemic, although it has started to slow in recent years.
A home equity loan is a powerful way to tap into that equity. It’s a type of second mortgage that allows homeowners to borrow a lump sum using their home’s equity as collateral.
How to Calculate Home Equity
Home equity is the difference between your home’s current market value and what you still owe on your mortgage. If your home is worth $350,000 and your remaining mortgage balance is $200,000, your equity is $150,000.
You build equity in two primary ways: paying down your mortgage principal over time, and benefiting from rising home values in your market.
As equity grows, it becomes a financial resource you can tap via a home equity loan or a line of credit to invest in your home, consolidate higher-rate debt, or cover major planned expenses.
You can use our home equity calculator to get an idea of how much equity you might have in your home.
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
Connect with an expert loan officer to put your equity to work
What Is a Home Equity Loan?
A home equity loan is a lump-sum loan secured by your home’s equity, generally repaid over 5 to 15 years with fixed monthly payments and a fixed interest rate.
It functions as a second mortgage, separate from your primary mortgage, but still uses your home as collateral, as described in the Consumer Financial Protection Bureau’s overview of home equity loans.
To see how it differs from other options, here’s a quick comparison:
|
Product |
How you access funds |
Interest type |
Repayment |
Collateral position |
Common use cases |
|
Home equity loan |
One-time lump sum at closing |
Typically fixed |
Equal monthly payments over a set term (often 5–15 years) |
Second mortgage |
Major renovations, debt consolidation, large planned expenses |
|
Primary mortgage |
Lump sum to purchase/refinance |
Fixed or adjustable |
Monthly payments over 15–30 years |
First mortgage |
Buying or refinancing the home |
|
HELOC |
Draw as needed up to a limit |
Typically variable |
Interest-only during draw, then principal + interest |
Second mortgage |
Ongoing projects, phased expenses, flexible cash access |
How Home Equity Loans Work
A home equity loan follows a relatively straightforward path from application to payoff, with one key guardrail shaping how much you can borrow: the combined loan-to-value (CLTV) cap.
The timeline from application to payoff
1. Prequalification and application
Here you’ll provide basic financial details, authorize a credit check, and submit documents such as income verification and mortgage statements.
2. Appraisal and underwriting
The lender orders an appraisal to confirm your home’s market value and reviews your income, debts, and credit profile to assess risk.
3. CLTV calculation and loan sizing
At this stage, the lender determines how much you can borrow based on your combined loan-to-value (CLTV) ratio. CLTV measures the total balance of all loans secured by your home. That includes your existing mortgage plus the new home equity loan relative to your home’s value.
Most lenders cap CLTV at roughly 80–85%, meaning you must retain at least 15–20% equity in your home.
Why CLTV caps matter:
- They limit over-borrowing, reducing the risk that homeowners end up owing more than their home is worth if prices fall.
- They protect lenders from higher default risk, which helps keep interest rates lower for borrowers who qualify.
- For homeowners, they act as a financial buffer, preserving equity that may be needed for refinancing, selling, or unexpected expenses later.
4. Closing and funding
After final approval, you sign the loan documents, pay any closing costs, and receive your funds as a lump sum.
5. Repayment and payoff
Your interest rate and monthly payment are fixed at closing, making payments predictable over the life of the loan, commonly between 5 and 15 years, until it’s paid off.
Common Uses for Home Equity Loans
Because the rate and payments are fixed, home equity loans are best for large, planned costs with a clear budget and timeline. They’re generally not a fit for short-lived or discretionary spending like vacations or gifts.
Homeowners often use home equity loans for:
- Home improvements or essential repairs that can increase property value.
- Debt consolidation
- Education or major medical expenses, when a defined payoff timeline is helpful.
Pros and Cons of Home Equity Loans
A fixed-rate loan means the interest rate never changes, so your monthly payment stays the same for the entire term.
|
Pros |
Cons |
|
Usually lower interest rates than unsecured credit like personal loans or credit cards |
Your home is collateral, which means several missed payments can lead to home ownership issues |
|
Fixed rate and predictable payments simplify budgeting |
Upfront fees and closing costs apply |
|
Potential tax-deductible interest when used for qualified home improvements (consult a tax pro) |
Reduces available equity and flexibility for future needs |
|
Clear payoff date with a set term |
Less ideal if you plan to move |
Qualification Requirements and Application Process
What lenders typically look for:
- Equity: At least 15–20% equity in your home after the new loan.
- Credit: A solid credit score (good or better) and responsible credit history.
- Debt-to-income (DTI): Often 43% or lower, though requirements vary by lender.
- Collateral valuation: A property appraisal to confirm current market value.
Documentation you’ll likely need:
- Recent pay stubs and W‑2s or tax returns (for self-employed).
- Mortgage statements and homeowners insurance.
- Property tax records and identification.
Fintech platforms like Lower are streamlining verification and workflow to speed up decisions while maintaining compliance, as highlighted in Coviance’s analysis of modernized home equity lending.
Comparing Home Equity Loans to HELOCs
A home equity loan isn’t the only option for accessing your home’s equity. A HELOC (home equity line of credit) offers revolving, flexible access to funds rather than a single lump sum.
But that flexibility comes with trade offs, including variable interest rates which means payments can change over the life of the loan.
|
Feature |
Home equity loan |
HELOC |
|
Access to funds |
Lump sum at closing |
Draw as needed up to a credit limit |
|
Interest |
Fixed |
Variable |
|
Payment structure |
Fixed monthly principal + interest |
Interest-only during draw, then principal + interest |
|
Best for |
Large, one-time expenses with defined budgets |
Ongoing or phased expenses and flexibility |
|
Rate sensitivity |
Not affected by short-term rate moves |
Rates typically change based on the index chosen, generally the prime rate, impacting payments immediately |
Costs and Closing Process
Expect some upfront costs at closing for a home equity loan, plus your ongoing interest expense.
Typical closing costs include an origination or underwriting fee, an appraisal fee, credit report and application fees, title search and recording fees, and state and local taxes. Exact amounts vary by both lender and market.
Always request a detailed estimate and consider your timeline when applying for a home equity loan. If you plan to sell soon, the upfront costs of a home equity loan may not be recouped.
The Bottom Line
A home equity loan provides a single lump sum against your home’s equity that is paid back over time. Home equity loans generally have a fixed rate, and are commonly paid back in terms of 5 to 15 years. They’re a strong option for debt consolidation and home renovation expenses, and generally have a lower rate than unsecured loans because they’re backed by your home.
Frequently Asked Questions
How much can I borrow with a home equity loan?
Most lenders let you borrow up to about 80–85% of your home’s value, minus your existing mortgage balance.
What are typical qualification criteria for a home equity loan?
You’ll generally need at least 15–20% equity, a solid credit score, a DTI around 43% or lower, and a successful appraisal.
Can I use a home equity loan for any expense?
Yes, but they’re best for large, planned expenses—like renovations or debt consolidation—where fixed payments and a clear payoff help.
How do fixed interest rates affect my payments?
A fixed interest rate keeps your monthly payment the same for the entire term, making budgeting straightforward.
What happens if I default on a home equity loan?
Because your home is collateral, default can lead to foreclosure—contact your lender immediately if you’re at risk of missing payments.