Home Equity Loan

A home equity loan allows a homeowner to borrow a single lump sum of money secured against the equity they have built up in their property, the difference between the home's current market value and any outstanding mortgage balance against it. Unlike a home equity line of credit, which works as a flexible, revolving line, a home equity loan disburses the full approved amount at once and is repaid through fixed installments over a set term, much like a conventional mortgage, which is why it is sometimes referred to as a second mortgage.

Because the loan is secured by the home, home equity loans generally carry considerably lower interest rates than unsecured personal loans or credit cards, reflecting the reduced risk a lender takes on when a specific, valuable asset backs the borrower's promise to repay. The home itself, however, becomes subject to foreclosure if the borrower fails to keep up with payments, adding a layer of risk that does not exist with unsecured borrowing.

A home equity loan lets a homeowner effectively convert part of the value built up in their home, often through years of mortgage payments and rising property prices, into usable cash today, while still committing to pay that borrowed amount back over time with interest. The home's accumulated equity acts as the collateral, giving the lender security and, in exchange, the homeowner a better interest rate than they could typically obtain through unsecured borrowing.

• Funding major home improvements, which can further increase the property's value.
• Consolidating higher-interest debt, such as credit card balances, into a single lower-rate secured loan.
• Covering large, one-time expenses such as education costs or medical bills, where a known, fixed amount is needed upfront.

Lenders typically limit a home equity loan to a set percentage of the home's appraised value, minus the outstanding balance on any existing mortgage, producing a combined loan-to-value ratio the lender is comfortable extending. A home with substantial existing equity and a low remaining mortgage balance generally supports a larger home equity loan than a home where the owner has only recently purchased and built up little equity so far.

The core difference between the two products is structural: a home equity loan provides one lump sum with a fixed rate and a fixed repayment schedule, making it well suited to a known, one-time expense, while a HELOC provides a flexible, reusable credit line typically at a variable rate, better suited to ongoing or uncertain borrowing needs. Many lenders offer both products side by side, and the right choice generally depends on whether the borrower's need is a single defined amount or an ongoing, less predictable source of funds.

In several countries, interest paid on a home equity loan is deductible against income tax under certain conditions, most commonly when the loan proceeds are used for home improvement rather than for unrelated personal spending such as paying off a vacation or a car purchase, though the specific rules, limits, and eligible uses vary significantly by jurisdiction and have changed over time as tax law has been revised. Borrowers are generally advised to confirm the current tax treatment with a qualified tax professional before assuming any particular deduction will apply, rather than relying on older or informal information about how the loan's interest will be treated.

Like a first mortgage, a home equity loan typically involves closing costs, including an appraisal fee to confirm the home's current value, origination fees charged by the lender, and sometimes title search and recording fees, all of which add to the effective cost of borrowing beyond the stated interest rate alone. Comparing the full cost, including these fees, across multiple lenders rather than focusing solely on the advertised interest rate is generally the most reliable way to identify the actual cheapest home equity loan option available.

• Consumer Financial Protection Bureau