Home Equity Loan

A home equity loan — sometimes called a "second mortgage" — allows you to borrow a fixed amount of money secured by the equity you've built in your home. Unlike a HELOC (which works like a credit card), a home equity loan delivers all the funds in a single lump sum at closing.

The loan is repaid in equal monthly installments of principal and interest over a fixed term, typically 5 to 20 years, at a fixed interest rate. Because the rate is fixed, your payment never changes — you know exactly what you owe each month from day one to payoff.

Home equity loans sit as a second lien on your property, behind your primary mortgage. Because second liens are riskier for lenders (they're paid back second in a foreclosure), interest rates on home equity loans are typically higher than first mortgage rates but meaningfully lower than personal loans or credit cards.

Home equity loan eligibility depends primarily on how much equity you have, your credit profile, and your income:

• Home equity: Most lenders require at least 15%–20% equity after the loan. In other words, the combined balance of your first mortgage plus the new home equity loan cannot exceed 80%–85% of your home's appraised value.
• Credit score: Typically 620 minimum; 680–700+ for competitive rates. Second-lien lenders price credit risk more sharply than first mortgage lenders.
• Debt-to-income ratio: Generally 43% or below, calculated including both your primary mortgage payment and the new home equity loan payment.
• Income and employment: Two years of verifiable income history. Lenders want confidence you can service both your first mortgage and the new loan simultaneously.
• Property type: Primary residences are most straightforward. Second homes and investment properties may qualify but at higher rates and with stricter equity requirements.

Home equity loans are not purchase loans — your equity replaces a down payment:

• Maximum loan amount formula: (Home value × max CLTV %) − first mortgage balance. Example: $450,000 home × 85% = $382,500 max CLTV. With a $280,000 first mortgage, maximum home equity loan = $102,500.
• Minimum loan amounts: Most lenders have a minimum home equity loan of $10,000–$25,000. It's rarely worth the paperwork for smaller amounts.
• Credit score and rate: A 700+ credit score can save you 0.5%–1.5% in rate versus a 620 score on a home equity loan. On a $100,000 loan over 15 years, that's a meaningful difference in total cost.

Home equity loan costs are moderate compared to refinancing your entire first mortgage:

• Closing costs: Typically 2–5% of the loan amount. For a $100,000 home equity loan, that's $2,000–$5,000. Some lenders offer "no closing cost" options that roll fees into a slightly higher rate.
• Appraisal: Most lenders require an appraisal to verify current market value. Full appraisals cost $400–$700; some lenders use automated valuation models (AVMs) and waive the appraisal for smaller loans or very strong equity positions.
• No mortgage insurance: Home equity loans don't require PMI or any form of mortgage insurance, regardless of your combined LTV, as long as you meet the lender's maximum LTV requirement.
• Prepayment penalties: Check your loan terms. Some lenders charge a fee if you pay off the loan early (within the first 3–5 years), especially on "no closing cost" products where they need to recoup waived fees.