A home equity loan is a fixed-rate second mortgage that gives you a lump sum of cash based on your home equity. Here is how it works, what it costs today, and when to use one.
A home equity loan is a fixed-rate second mortgage that gives you a lump sum of cash based on your home equity. Here is how it works, what it costs today, and when to use one.
Home Equity Loan — Facts
8.0%–9.5%
Fixed
Lump sum
5–30 years
85–90%
2–3% (often waived)
How a Home Equity Loan Works
A home equity loan is a second mortgage with a fixed interest rate and fixed monthly payment. You receive the full loan amount at closing and repay it over a set term (5–30 years). Because the rate is fixed, your payment never changes — unlike a HELOC's variable rate.
Home Equity Loan Calculation
Maximum loan amount = (Home Value × Max CLTV%) − First Mortgage Balance
Example: $400,000 home × 85% max CLTV = $340,000 − $200,000 first mortgage = $140,000 maximum home equity loan.
Requirements
Minimum 15–20% equity (80–85% CLTV max)
Credit score 620+ (700+ for best rates)
Steady income (2-year history)
DTI under 43–50%
Primary residence, second home, or investment property (investment requires more equity)
Best Uses for a Home Equity Loan
Home renovation with defined cost
Debt consolidation (paying off high-rate credit cards)
Major purchases (vehicle, education) where a fixed payment is preferred
Emergency fund backup with predictable payment
Frequently Asked Questions
Current home equity loan rates range from 8.0%–9.5% for well-qualified borrowers with 700+ credit scores and 20%+ equity. Rates are higher than first mortgages because home equity loans are second liens — in foreclosure, the first mortgage is paid before the second lien. Credit unions typically offer 0.5–1% lower rates than large banks.
For a single, defined expense (kitchen remodel, debt payoff), a home equity loan's fixed rate and predictable payment is usually better. For ongoing or uncertain expenses (phased renovation, emergency access), a HELOC's flexibility and interest-only draw period is better. If you plan to pay off the balance quickly, a HELOC (interest-only during draw) may cost less than a home equity loan with full amortization.
Disclaimer: Smart Mortgage Guide provides educational content only. We are not a licensed mortgage lender, broker, or financial advisor. Rates, limits, and program details are subject to change. Always consult with a licensed mortgage professional before making financial decisions.