What Is Home Equity Loan?
A home equity loan is a second mortgage that lets you borrow a lump sum against the equity in your home at a fixed interest rate with fixed monthly payments, typically over 5 to 30 years. Unlike a HELOC, a home equity loan provides all funds upfront. Your home serves as collateral — if you can't make payments, the lender can foreclose, even if you're current on your first mortgage.
Key Facts
- Home equity loans are fixed-rate with predictable monthly payments — unlike HELOCs, which have variable rates and fluctuating payments tied to the prime rate
- Most lenders allow combined loan-to-value (CLTV) up to 80-85% — meaning your first mortgage plus home equity loan cannot exceed 80-85% of your home's value
- Interest on home equity loans may be tax-deductible if the funds are used for home improvements (not personal expenses) under the Tax Cuts and Jobs Act of 2017 — consult a tax professional
- Home equity loans carry closing costs of 2-5% of the loan amount, including appraisal, title search, origination fee, and recording fees — making them less cost-effective for small amounts
- A home equity loan creates a second lien on your property — in foreclosure, the first mortgage is paid first, and the second lien holder recovers only if proceeds remain
Live Data
How Does a Home Equity Loan Work?
A home equity loan functions as a second mortgage with straightforward mechanics:
- Application: You apply with a lender, who appraises your home, checks your credit, and verifies your income and existing mortgage balance
- Approval: The lender determines how much equity you can borrow against, typically up to 80-85% of your home's value minus your existing mortgage balance
- Disbursement: You receive the full loan amount as a lump sum at closing
- Repayment: You make fixed monthly payments of principal and interest over the loan term (commonly 5, 10, 15, or 20 years)
- Lien position: The home equity loan is recorded as a second lien on your property, subordinate to your first mortgage
Home Equity Loan vs. HELOC
Both use your home as collateral, but the structures differ significantly:
- Home equity loan: Lump sum, fixed rate, fixed payments, one-time disbursement. Best for a known, specific expense — a major renovation, debt consolidation, or a large one-time cost.
- HELOC: Revolving line of credit, variable rate, flexible draws, draw period followed by repayment period. Best for ongoing or unpredictable expenses — home improvements over time, emergency access to funds.
The key advantage of a home equity loan is payment predictability. You know exactly what you'll pay each month for the life of the loan. With a HELOC, your payments can increase significantly if interest rates rise.
Home Equity Loan vs. Cash-Out Refinance
A cash-out refinance replaces your entire first mortgage with a larger one and gives you the difference in cash. Comparing the two:
- Home equity loan: Keeps your existing first mortgage intact. Useful if your first mortgage has a low rate you want to preserve. Adds a second monthly payment.
- Cash-out refinance: Replaces your first mortgage entirely. One payment, potentially a lower blended rate. But if current rates are higher than your existing first mortgage rate, you'll pay more on the entire balance — not just the new funds.
Risks of Home Equity Loans
Home equity loans carry real risks that borrowers should understand:
- Foreclosure risk: Your home is collateral. If you default on either the home equity loan or your first mortgage, you can lose your home.
- Reduced equity buffer: Borrowing against equity reduces your financial cushion. If home prices decline, you could end up underwater.
- Two payments: You now have two mortgage payments instead of one, increasing your total housing cost and DTI ratio.
- Closing costs: At 2-5% of the loan amount, the upfront costs can be significant — a $50,000 loan might have $1,000-$2,500 in closing costs.
Why Home Equity Loans Matter for Financial Distress
When homeowners take home equity loans to pay off credit card debt, cover medical bills, or supplement lost income, they're converting unsecured debt into secured debt — putting their home at risk. At a population level, rising home equity borrowing signals household buffer depletion. The American Distress Index tracks this pattern through the Buffer Depletion component, where increased HELOC balances and home equity lending indicate households are consuming their largest financial asset to stay current on other obligations.
State-by-State Variations
Home equity loan regulations vary by state, with some states imposing additional consumer protections on second mortgage lending.
| State | Key Difference |
|---|---|
| Texas | Uniquely restrictive: combined LTV on all home equity borrowing capped at 80% (Texas Constitution Art. XVI § 50). Equity loans require 12-day waiting period and cannot be closed at the homeowner's residence. No home equity lending on agricultural property. |
| New York | Mandatory 3-day right of rescission on home equity loans (federal TILA). New York also requires specific disclosures about rate lock periods and closing cost estimates under state banking law. |
| California | Anti-deficiency protections do NOT typically apply to home equity loans (they apply to purchase money mortgages). A lender can pursue a deficiency judgment on a defaulted home equity loan. |
| Florida | Unlimited homestead exemption protects equity from creditors in bankruptcy but does not prevent foreclosure by a home equity loan lender — the voluntary lien takes priority over the exemption. |
| North Carolina | No specific additional restrictions beyond federal requirements. However, NC's strong judicial foreclosure protections (Clerk of Superior Court hearing) apply to home equity loan foreclosures as well. |
Frequently Asked Questions
How much can I borrow with a home equity loan?
Most lenders allow you to borrow up to 80-85% of your home's value minus your existing mortgage balance. Example: home worth $400,000, mortgage balance $250,000, at 80% CLTV you can borrow up to $70,000 ($400,000 × 0.80 = $320,000 − $250,000 = $70,000). Some lenders go up to 90% CLTV.
Is a home equity loan the same as a second mortgage?
A home equity loan is one type of second mortgage. HELOCs are the other common type. Both create a second lien on your property, subordinate to your first mortgage. The term 'second mortgage' refers to the lien position, while 'home equity loan' describes the specific product structure (fixed rate, lump sum).
What credit score do I need for a home equity loan?
Most lenders require a credit score of 680+ for home equity loans, though some accept 620. Higher scores get better rates. You'll also need a debt-to-income ratio below 43-50%, sufficient equity (typically at least 15-20% after the loan), and verifiable income.
Can I lose my house with a home equity loan?
Yes. A home equity loan is secured by your home. If you default on payments, the lender can foreclose — even if you're current on your first mortgage. Before taking a home equity loan, make sure you can afford both monthly payments and have accounted for potential income disruptions.
Is home equity loan interest tax-deductible?
Only if the loan funds are used to buy, build, or substantially improve the home that secures the loan. The Tax Cuts and Jobs Act of 2017 eliminated the deduction for home equity loans used for other purposes (debt consolidation, vacations, etc.). The combined mortgage interest deduction limit is $750,000.