What Is a Home Equity Loan?

A home equity loan is a fixed-rate second mortgage that lets you borrow against the equity you've built in your home. You receive a lump sum upfront and repay it in fixed monthly installments over a set term — typically 5 to 20 years. Because your home serves as collateral, rates are significantly lower than personal loans or credit cards.

Lenders typically allow you to borrow up to 80–85% of your home's value minus your existing mortgage balance. So if your home is worth $400,000 and you owe $250,000, your maximum combined loan-to-value at 85% is $340,000 — meaning you could borrow up to $90,000.

This is different from a HELOC (Home Equity Line of Credit), which works like a credit card with a variable rate. A home equity loan gives you predictability: the same payment every month for the life of the loan.

How to Calculate Home Equity Loan Payments

Home equity loan payments use the same standard amortization formula as a primary mortgage:

M = P × [r(1+r)^n] / [(1+r)^n − 1]

Where: P = loan amount, r = monthly interest rate (annual rate ÷ 12), n = total number of payments (years × 12)

Example: $50,000 at 8.5% for 10 years → monthly rate = 0.708% → monthly payment = $620. Total paid = $74,400. Total interest = $24,400.

Home Equity Loan vs HELOC

Feature	Home Equity Loan	HELOC
Interest Rate	Fixed	Variable
Disbursement	Lump sum	Draw as needed
Monthly Payment	Fixed & predictable	Varies with balance/rate
Draw Period	None	10 years (interest-only)
Best For	One-time large expenses	Ongoing or uncertain costs
Typical Rate (2025)	7.5%–11%	Prime + 0.5%–2%

Pros and Cons of Home Equity Loans

Advantages

✓ Fixed rate — predictable payments
✓ Lower rates than personal loans or credit cards
✓ Interest may be tax-deductible if used for home improvement
✓ Lump sum ideal for large one-time expenses
✓ No restrictions on how funds are used

Risks

✗ Your home is collateral — risk of foreclosure
✗ Closing costs: 2–5% of loan amount
✗ Requires 15–20% existing equity
✗ Two mortgage payments each month
✗ Reduces equity available for future needs

Frequently Asked Questions

How much can I borrow with a home equity loan?

Most lenders allow up to 80–85% combined LTV. Subtract your mortgage balance from that figure to find your maximum. Example: $400K home at 85% LTV = $340K max total debt. If you owe $250K, you can borrow up to $90K.

What credit score do I need?

Most lenders require a minimum 620 score, but 700+ qualifies for the best rates. Scores below 680 may face higher rates or stricter LTV limits.

Is home equity loan interest tax deductible?

Yes, if proceeds are used to "buy, build, or substantially improve" the home securing the loan. If used for other purposes (debt consolidation, vacations), interest is generally not deductible. Consult a tax advisor.

How long does approval take?

Typically 2–6 weeks from application to funding, including appraisal, underwriting, and closing. Some lenders offer expedited 2-week closings.

Home equity loan vs cash-out refinance — which is better?

A cash-out refi replaces your entire first mortgage at current rates. If your current rate is lower than today's rates, a home equity loan is usually better since it leaves your first mortgage intact. If current rates are lower than your existing rate, a cash-out refi may save more overall.

Can I get one with bad credit?

Possible but difficult. Some lenders work with scores as low as 580, but expect higher rates, lower LTV limits, and stricter income requirements. A co-borrower with good credit can help.

Also compare: HELOC Calculator for variable-rate lines of credit, Refinance Calculator for cash-out refinance comparison, and Extra Payment Calculator to see if paying down your current mortgage first makes more sense.

Home Equity Loan Calculator