How Home Equity Loans Work

If you’re a homeowner looking for a way to fund major expenses—like home renovations, debt consolidation, or education costs, a home equity loan might be a smart option. But before you tap into your home’s value, it’s important to understand how home equity loans work.

What Is a Home Equity Loan?

A home equity loan, often referred to as a “second mortgage,” allows you to borrow against the equity you’ve built in your home. Equity is the difference between what your home is worth and what you still owe on your mortgage.

For example, if your home is worth $300,000 and you owe $200,000, you have $100,000 in equity. Lenders typically allow you to borrow up to 80–85% of your home’s appraised value, minus what you owe on the mortgage.

How does a Home Equity Loan work?

A home equity loan is a lump-sum loan with a fixed interest rate and a fixed repayment term, usually ranging from 5 to 30 years. That means you’ll make consistent monthly payments over time until the loan is fully paid off.

Here’s a simplified breakdown:

• Loan Amount: Based on your home’s equity

• Interest Rate: Fixed (unlike a HELOC, which often has a variable rate)

• Repayment: Monthly installments over a set term

Pros of Home Equity Loans

• Predictable payments thanks to fixed interest rates

• Lower interest rates compared to credit cards or personal loans

• Large loan amounts for major expenses

Cons of Home Equity Loans to Consider

• Your home is collateral—missed payments could lead to foreclosure

• Closing costs and fees can add up

• Reduced equity in your home until the loan is paid off

Is a Home Equity Loan right for you?

Home equity loans are best suited for homeowners with significant equity and a stable income who need a lump sum for one-time expense. Always compare offers from multiple lenders and consider alternatives, like a home equity line of credit (HELOC), before making a decision.

Understanding how a home equity loan works can help you make informed financial choices—and turn your home’s value into a powerful financial tool.

How I Can Help You

When it comes time to purchase a home or refinance an existing loan, I want to help you! Hopefully articles like this give you good information and a better understanding of the mortgage world but let me use my experience and expertise to help you with your particular situation.

I tell my clients and referral partners that a mortgage transaction starts with a simple conversation. Let’s talk about your financial situation, budget, and goals so that I can help you determine the best solution for you. During a 10-minute informal conversation, we can get you on the right path as it relates to a home purchase or mortgage refinance.