Home Equity Loan

Home equity loan summary:

• A home equity loan allows you to borrow money against your home, even if you’re still paying off your mortgage. 

• Home equity loans typically feature a fixed interest rate and are repaid in equal monthly installments.

• You could use a home equity loan to fund a large expense or consolidate debt.  

Home equity loan definition and meaning

The home equity in your property is the difference between the home's value and the amount you owe on the mortgage. For example, if your home is worth $400,000 and you still owe $200,000 on your mortgage, you have $200,000 in home equity. A home equity loan allows you to borrow against that equity. A home equity loan is a mortgage.

There are attractive benefits associated with a home equity loan, but there's also risk. Your home acts as collateral. If you fail to repay the loan, you could lose the home.  

Key concept: A home equity loan allows you to borrow against your home, if you have enough equity. 

More about home equity loan

Home equity loans are often called second mortgages because, for the homeowner who still owes money on their first mortgage, it's another loan secured by the home. 

You could use a home equity loan for just about any purpose. Many people use a home equity loan to cover a large expense, like home repairs or medical bills, or for debt consolidation. 

In the case of debt consolidation, a home equity loan could mean significant savings. Home equity loans typically have lower interest rates compared to the rate on credit cards and most personal loans. 

Home equity loan: a comprehensive breakdown

Home equity loans have plenty of attractive benefits, including:

• Fixed interest rate. Home equity loans typically feature a fixed interest rate, so you never have to worry about the rate changing.

• Lower interest rate. The interest rate on a home equity loan is typically lower than the rates on unsecured debt like personal loans and credit cards. 

• Flexibility. Lenders usually have few restrictions on what you can do with your home equity loan money. You could pay for a wedding, renovate your kitchen, or use your loan to consolidate higher interest debt.

• Lump-sum payment. With a home equity loan, you receive the entire loan amount upfront. 

• Potential for tax deduction. According to the IRS, for tax years 2018 through 2025, if a home equity loan is used to "buy, build, or substantially improve the residence," interest paid on the funds may be deductible, subject to certain dollar limitations. (Talk to a tax professional about your specific situation.)

Home equity loans vary by lender, so shop around before making a final decision.