A home equity loan lets you borrow against the equity you’ve built in your home. You receive the funds as a lump sum and repay the loan in monthly installments. Because these loans are secured by your home’s equity, they’re often referred to as second mortgages.

You can take out a home equity loan to fund a variety of purposes, from covering a major purchase to consolidating debt. But home equity loans come with downsides, so it’s a good idea to understand the risks and alternatives before applying for one.

Key takeaways

• Equity is the difference between your home’s current value and the amount you still owe on your mortgage.
• You can borrow up to 80% of your home’s equity and use your home as collateral.
• Because home equity loans are a second mortgage, you’ll be responsible for another monthly payment along with your original mortgage payment.

When you take out a home equity loan, you’re borrowing money against the equity you’ve built in your home. Equity is the difference between what your home is currently worth and how much you owe on your mortgage.

You’ll receive the money as a lump sum payment and start paying it off immediately. Home equity loans usually have fixed interest rates, meaning the amount you owe each month won’t change over time.

Home equity loans are often referred to as a second mortgage because they’re secured with your house as collateral. This means you’ll be responsible for another monthly payment on top of your original mortgage payment.

Here are a few pros and cons of home equity loans to consider:

If you want to apply for a home equity loan, follow these five steps:

The first step is to figure out how much equity you could borrow from. To do this, you’ll need to schedule a home appraisal. An appraiser will assess your home and compare it to similar houses in your area to determine how much your home is worth. Appraisals generally cost $300 to $500 and are usually included in your closing costs.

Once you’ve gotten your home appraised, you’ll subtract your existing mortgage balance from the appraised value of your home to estimate how much home equity you have. Keep in mind that most lenders will only allow you to borrow 80% of your available equity.

Next, you can comparison shop among different lenders. It’s a good idea to get quotes from at least three different lenders so you can find the best rates and terms for your loan.

The exact requirements will vary depending on your lender, but here are some common guidelines for home equity loans:

• At least 15% to 20% equity in your home
• A credit score of 620 or higher
• A debt-to-income ratio (DTI) below 43%

Once you’ve chosen a lender, you’ll complete a loan application. Be prepared with significant documents, such as a government-issued photo ID, recent pay stubs and W-2s, and recent mortgage and property tax statements.

At closing, you’ll sign any necessary documents and receive the full home equity loan amount. You’ll also start making monthly loan payments immediately.

If you’re not sure whether a home equity loan is the right choice for you, a home equity line of credit (HELOC) and cash-out refinance are popular alternatives:

• A HELOC is an open-end line of credit that allows you to borrow against your home equity. Once you repay the principal, you can borrow against the funds as often as needed.
• A cash-out refinance allows you to refinance your home for more than you owe and receive the difference in cash. The following table highlights some of the main differences and eligibility criteria for each type of loan.

Here are some other alternatives to home equity loans:

• Credit cards: A credit card allows you to borrow funds up to a pre-approved spending limit. It’s an unsecured line of credit, so you won’t put your home at risk. However, credit cards typically come with higher interest rates than home loans or personal loans, so you should only consider this option if you can receive a card with an introductory 0% APR. Just keep in mind that if you can’t pay off your balance before the introductory period ends, the card’s regular APR will kick in and apply to any remaining balance.

• Personal loans: A personal loan is similar to a home equity loan in that you receive a fixed amount of money upfront. Since these loans are unsecured, you won’t put your home at risk if you default on the loan. The application process is also easier and faster than taking out a home equity loan. However, you may not be able to borrow as much with a personal loan, and you’ll likely receive shorter repayment terms.

A home equity loan allows you to borrow against the equity you’ve accumulated in your home. Most people take out a home equity loan to finance a major purchase or to consolidate high-interest credit card debt.

Taking out a home equity loan comes with benefits and drawbacks. These loans come with fixed interest rates, so you’ll know how much your payments will be each month. Additionally, the borrowing costs are lower than what you’d receive with other types of loans.

However, you’re using your home to secure the loan. If you default on a home equity loan, you risk losing your property. You’ll have to make home equity loan payments on top of your existing mortgage payment, so you should make sure you can afford both payments each month.

Equity is the difference between the current value of your home and how much you owe on your mortgage.

Yes, home equity loans and HELOCs allow you to access the equity in your home without refinancing. That means you won’t have to pay closing costs, but your lender may charge other fees, such as for an appraisal. Make sure you understand all of the terms and conditions that come with your loan.