Home Equity Loan
Definition and meaning of Home Equity Loan in real estate.
A home equity loan is a type of consumer debt that allows homeowners to borrow a lump sum of money against the equity they have built in their residential property. The loan is secured by the home, making it a second mortgage with fixed interest rates and predictable monthly payments.
In more detail
Because the home serves as collateral, these loans generally offer lower interest rates than unsecured options like personal loans or credit cards. Homeowners commonly use these funds for major expenses like home renovations, debt consolidation, or college tuition. However, failing to make the monthly payments can result in foreclosure, making this a higher-risk borrowing option for homeowners. Lenders typically require a home appraisal and check the borrower's credit score and debt-to-income ratio before approval.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Payout type | One-time lump sum |
| Interest rate | Typically fixed |
| Risk to borrower | Foreclosure if payments are missed |
A homeowner borrows a lump sum through a home equity loan to repair a foundation, agreeing to repay the loan over a fixed term of several years.
Frequently asked questions
How much equity do I need to get a home equity loan?
Most lenders require you to retain at least 15 to 20 percent equity in your home after taking out the loan, meaning your combined loan-to-value ratio cannot exceed 80 to 85 percent.
Can I deduct home equity loan interest on my taxes?
Under current federal tax laws, the interest is only deductible if the borrowed funds are used specifically to buy, build, or substantially improve the home that secures the loan.