A home equity loan (often referred to as a second mortgage) allows you to borrow a lump sum of money using the equity built up in your home as collateral. Unlike a home equity line of credit (HELOC), which is a revolving line with a variable rate, a home equity loan provides a fixed sum with fixed interest rates and monthly payments. This makes them ideal for funding major projects like home renovations, debt consolidation, or education.
Lenders limit the amount you can borrow based on your **Loan-to-Value (LTV)** ratio. For home equity loans, lenders typically allow a maximum combined loan-to-value (CLTV) ratio of 80% to 85%. This means the sum of your primary mortgage plus the new home equity loan cannot exceed 80% to 85% of your home's current appraised market value.
To see how a revolving line of credit compares to a fixed loan, check our HELOC calculator or check our general primary mortgage calculator.
Let us look at a practical example: - Your home is appraised at $300,000. - Lenders permit a maximum CLTV of 80%, which equals $240,000 in total permitted debt. - You owe $180,000 on your primary mortgage. - Your maximum permitted home equity loan is: \(240,000 - 180,000 = \$60,000\). Your monthly payments are based on this $60,000 borrow sum.
To check standard term payments and interest calculations, try our term loan calculator or check the loan repayment solver.
The main benefit of a home equity loan is the security of fixed monthly payments. Unlike variable-rate debts, your interest rate is locked in at the time of signing and will not change. This shields your household budget from rising interest rates in the future.
To compare this option with replacing your entire primary mortgage, check our mortgage refinance calculator or check our general interest rate tool.
Because your home serves as collateral for the loan, defaulting on a home equity loan carries high risk. If you are unable to make the payments, the lender can foreclose on your home, just as they could with a primary mortgage. Only borrow what you can comfortably afford to repay.
Similar to primary home loans, home equity agreements incur closing costs. These fees include home appraisal fees, credit check reports, title search clearances, underwriting charges, and recording fees. In total, these closing costs typically range between 2% and 5% of the borrowed sum. Some banks offer "no-closing-cost" second mortgages, but they offset this by charging slightly higher interest rates over the life of the loan.
Under current IRS tax rules, the interest paid on a home equity loan is only tax-deductible if the proceeds are used exclusively to "buy, build, or substantially improve" the specific home that secures the debt. If you use the loan funds to pay off credit card balances, buy a vehicle, or fund a family vacation, the interest charges are no longer tax-deductible. Always consult a tax advisor to confirm your eligibility.