A home equity loan is a type of loan that allows homeowners to borrow against the value of their home. It’s often referred to as a second mortgage because it uses your home as collateral, just like your original mortgage.
How It Works
When you take out a home equity loan, you receive a lump sum of money based on the equity you’ve built up in your home. Equity is the difference between your home’s market value and the outstanding balance on your mortgage. For example, if your home is worth $300,000 and you owe $200,000, your equity is $100,000.
Lenders typically allow you to borrow up to 80–90% of your available equity, depending on your credit score and income.
Repayment Terms
Home equity loans come with fixed interest rates and are repaid over a set period—usually 5 to 30 years. Your monthly payments stay the same throughout the term, making it a predictable and manageable option for many homeowners.
Common Uses
People often use home equity loans for:
- Home improvements or renovations
- Debt consolidation
- Education expenses
- Emergency medical bills
- Large one-time purchases
Pros and Cons
Pros:
- Fixed interest rate and predictable payments
- Potentially lower interest rates compared to credit cards
- Lump sum ideal for large expenses
Cons:
- Your home is at risk if you default
- Closing costs and fees may apply
- Not ideal for short-term borrowing needs
Final Thoughts
A home equity loan can be a smart way to access funds at a lower interest rate, especially for significant expenses. However, it’s essential to borrow responsibly and ensure you can manage the repayments—because your home is on the line.
