Home equity loans (fixed-rate lump sums)

How a home equity loan works

A home equity loan is a second mortgage when you still owe on your home: a separate loan that ranks behind the first. You borrow one fixed amount, receive it as a lump sum and repay it in equal installments, so you carry two housing payments until it is paid off.

• Rate: usually fixed at closing for the whole term
• Funds: one lump sum, not a line you draw on
• Payment: principal and interest, the same every month
• Term: set upfront, often 10 to 20 years

Every payment covers interest and principal from the first one, so the balance falls on a fixed schedule to zero. There is no draw period, no interest-only phase and nothing to re-borrow.

How much you can borrow

Your limit is the home's value times the lender's combined loan-to-value (CLTV) cap, minus what you owe on the first mortgage. Caps typically run 80–85%, and some lenders go to 90% for strong borrowers on a primary home.

When the money arrives

1. Application with income, debt and property documents
2. Appraisal or automated valuation of the home
3. Closing: you sign the note and pay closing costs
4. Rescission period of three business days on a primary home
5. Funds released to you by check or wire

Regulation Z § 1026.23 lets you cancel without penalty during that window, and the lender cannot release the money until it ends. The right covers your principal dwelling, not a second home or a rental.

What a home equity loan really costs

A home equity loan is priced as a fixed rate plus a term, and second liens often price above first mortgages. No official average exists for these rates, so the table below uses three illustrative ones set near the 7.00% prime rate (Oct 27, 2026): 7.50%, 8.50% and 9.50%.

The term sets the trade-off between payment and total cost. At 8.50%, $50,000 costs $620 a month over 10 years, $492 over 15 and $434 over 20, and the 20-year loan totals $54,160 in interest, against $38,560 for 15 years.

A HELOC on the same $50,000 starts lower: $333 a month interest-only at 8.00%, then $418 once repayment begins. The fixed loan costs more each month up front, but its payment never steps up and its rate never rises.

Costs that sit outside the monthly payment

The payment is only part of the price. Four items outside it are worth finding in your loan estimate and note before closing:

• Closing costs: typically 2–5% of the loan, for appraisal, title and lender fees
• Interest from day one: charged on the full lump sum, idle or not
• Early-payoff fee: some lenders charge one if you repay or refinance early
• Second payment: your first mortgage payment continues on top

When a home equity loan goes wrong

A fixed rate removes payment surprises, not risk. What remains is exposure to your home's value, your budget and the lien itself:

• Falling home values: you can end up owing more than the home is worth
• Foreclosure: default on either loan can put the home at risk
• Stacked payments: two housing payments tighten your budget if income drops
• Costly exit: sunk closing costs and any payoff fee penalize early sales or refinances

The CFPB notes that a second mortgage ranks behind the first and is paid from whatever remains after a sale, which is why these loans often carry higher rates. Using one to consolidate credit cards also turns unsecured balances into debt your home secures.

Home equity loan vs. HELOC, cash-out refinance and personal loan

These four options can fund the same expense, but they differ in how the money arrives, how the rate behaves and whether your home secures the debt.

If your first mortgage rate sits well below today's rates, keeping it and adding a fixed second loan usually beats refinancing the whole balance. For the full comparison, read the HELOC vs. home equity loan breakdown or the cash-out refinance guide.

Who a home equity loan fits

A home equity loan suits an expense you can price today: the amount is known, the timeline is short and you want a payment that never moves.

• One defined renovation with a contractor's quote in hand
• Debt consolidation with a fixed payoff target
• Homeowners who want a payment that never changes
• Anyone keeping a low first-mortgage rate untouched

Skip it if your costs are open-ended or arrive in stages: interest runs on the full amount from closing, while a HELOC charges only on what you draw. Skip it too if you cannot carry another fixed payment.

Home equity loan: pros and cons

What lenders check before approving

Underwriters look at three numbers first: a credit score of 620–680 or higher, a debt-to-income ratio near 43% or lower, and 15–20% equity remaining after the loan funds. Some lenders stretch DTI to 50% when other factors are strong.

The best pricing usually goes to scores of 720 or higher with equity to spare. Second homes and rental properties face tighter limits, and some lenders will not lend on them at all.

Requirements at a glance

• Combined loan-to-value at or below 80–85% (some lenders allow 90%)
• Credit score of 620–680 or higher, depending on the lender
• Debt-to-income ratio of 43% or lower at many lenders, up to 50% at some
• Appraisal or automated valuation confirming the home's value
• Documented income that covers both housing payments
• Clear title, and any existing mortgage current and in good standing