How Does a Home Equity Loan Work?
A home equity loan lets you borrow a fixed lump sum against the equity in your home at a fixed interest rate. You repay it in equal monthly payments over 5–30 years. Current national average rate: 7.86% APR. Here is everything you need to know before applying.
What Is a Home Equity Loan?
A home equity loan — sometimes called a second mortgage or HEL — is a loan secured by your home that lets you borrow against the equity you've built up. Unlike a HELOC, you receive the full amount upfront as a lump sum and repay it at a fixed interest rate over a set term. Your first mortgage stays exactly as it is.
Think of it this way: if your home is worth $500,000 and you owe $300,000 on your mortgage, you have $200,000 in equity. Most lenders will let you borrow up to 80–90% of your home's value minus what you already owe. In this example, that means up to $150,000–$200,000 available to borrow.
How the Math Works — How Much Can You Borrow?
Lenders calculate your available equity using Combined Loan-to-Value (CLTV):
| Variable | Example | Your numbers |
|---|---|---|
| Home current value | $500,000 | Enter below |
| First mortgage balance | $300,000 | Enter below |
| Max CLTV (80%) | $400,000 | Value × 0.80 |
| Maximum you can borrow | $100,000 | Max CLTV minus mortgage balance |
| At 90% CLTV (some lenders) | $150,000 | Value × 0.90 minus balance |
Home Equity Loan Calculator
Home Equity Loan vs HELOC vs Cash-Out Refinance
These are the three main ways to access your home equity. The right choice depends on your situation:
| Feature | Home Equity Loan | HELOC | Cash-Out Refinance |
|---|---|---|---|
| Rate type | Fixed | Variable | Fixed |
| How you receive funds | Lump sum | Draw as needed | Lump sum |
| Current avg rate | 7.86% | 7.25% | 6.67% |
| Affects first mortgage? | No | No | Yes — replaces it |
| Best for | One-time large expense, predictable budget | Ongoing costs, renovation over time | Need large sum AND want to lower first mortgage rate |
| Risk if you have a low first mortgage rate | None — first mortgage untouched | None — first mortgage untouched | High — you lose your low rate forever |
| Closing costs | 2–5% of loan | Low or none | 2–5% of full loan |
When a Home Equity Loan Makes Sense
A home equity loan is the right tool when:
- You need a specific lump sum for a one-time expense — home renovation, debt consolidation, college tuition, medical bills
- You want payment certainty — a fixed rate means the same payment every month for the life of the loan, unlike a HELOC which fluctuates with the prime rate
- You have a low existing mortgage rate — keeps your first mortgage untouched while giving you access to equity
- Rates are rising or uncertain — locking in a fixed rate protects you from future rate increases that would affect a HELOC
- You are consolidating high-interest debt — replacing 20%+ credit card debt with a 7.86% home equity loan saves significantly, though it converts unsecured debt to secured debt
When a Home Equity Loan Is the Wrong Choice
- You need money over time, not all at once — a HELOC is more flexible and you only pay interest on what you draw
- You are not sure how much you need — taking a larger lump sum than you need means paying interest on unused funds
- Your income is unstable — you are adding a second required monthly payment on top of your mortgage. Missing payments on a home equity loan puts your home at risk
- You plan to sell soon — closing costs of 2–5% may not be worth it if you are moving within 1–2 years
How to Apply: Step by Step
Check your equity and credit score
You need at least 15–20% equity remaining after the loan (most lenders cap at 80–85% CLTV). A 620+ credit score is typically required; 700+ gets significantly better rates.
Get your home appraised
Lenders order an appraisal to confirm your home's current value. This typically costs $300–$600 and is your responsibility. Some lenders use automated valuation models (AVMs) for smaller loans.
Shop at least 3 lenders
Home equity loan rates vary significantly between lenders. Check your current mortgage lender, local credit unions (often have the best rates), and online lenders. Multiple applications within a 14-day window count as one hard inquiry.
Submit your application
You will need: most recent pay stubs, W-2s for 2 years, bank statements, your mortgage statement, and homeowners insurance info. Self-employed borrowers need 2 years of tax returns.
Underwriting and closing
The process typically takes 2–6 weeks. After closing there is a 3-day right of rescission period — you can cancel within 3 business days. Funds are typically disbursed on day 4.
Tax Deductibility
Home equity loan interest is tax deductible if and only if you use the funds to buy, build, or substantially improve the home that secures the loan. Using a home equity loan to renovate your kitchen: deductible. Using it to pay off credit cards or fund a vacation: not deductible.
The deduction is subject to the $750,000 total mortgage debt limit (combined first mortgage + home equity loan). Consult a tax professional for your specific situation before assuming deductibility.
Current Home Equity Loan Rates by State
Rates below are calculated from the national Curinos average of 7.86% plus state-level spreads. Updated June 26, 2026.
For your state's full rate table including 30-year, 15-year, FHA, VA, and HELOC rates, visit your state mortgage rates page.