Home Equity Loan Explained: A Fixed-Rate Second Mortgage

A home equity loan is a second mortgage that gives you a lump sum of cash at a fixed interest rate, repaid over a set term (typically 5 to 30 years). Unlike a HELOC, you receive all the money upfront and have a fixed monthly payment.

How It Works

• •You borrow a specific amount against your home equity
• •You receive the full amount as a lump sum at closing
• •You repay with fixed monthly payments over the term
• •The rate is fixed — it does not change

Home Equity Loan vs. HELOC

How Much Can You Borrow?

Most lenders allow a combined LTV up to 85%:

Max Loan = (Home Value x 85%) - Current Mortgage Balance

Example: $500,000 home, $300,000 mortgage → max home equity loan = $125,000

When a Home Equity Loan Makes Sense

• •Major one-time expense — a large renovation, medical bill, or tuition payment
• •Debt consolidation — pay off high-interest debt with a lower fixed rate
• •You want payment certainty — fixed rate and payment for the full term
• •Your current mortgage rate is lower than today's rates — you do not want to refinance your first mortgage

When a HELOC Is Better

• •Flexible access — you need to draw funds over time
• •Emergency backup — you want access without a lump sum commitment
• •Uncertain total cost — you do not know exactly how much you need

Risks

• •Your home is collateral — default leads to foreclosure
• •Closing costs (typically 2-5% of the loan amount)
• •Reduces your equity cushion
• •Variable alternatives (HELOC) may have lower initial rates

Key Takeaways

• •A home equity loan is a fixed-rate, lump-sum second mortgage
• •You get all the money upfront with a fixed monthly payment
• •Best for one-time, known expenses where you want payment certainty
• •Compare with HELOC (flexible access) and cash-out refinance (replaces first mortgage)
• •Use our Home Equity Calculator to see your available equity