Home equity loan

Also called second mortgage

A lump-sum loan secured by home equity, usually with a fixed rate and fixed payments, taken alongside the existing mortgage.

What it means

A home equity loan provides the full amount at once and is repaid in equal monthly installments over a set term, often 5 to 30 years depending on the lender. It sits behind the first mortgage as a second lien, so the original mortgage and its rate stay in place.

Lenders limit the amount by combined loan-to-value ratio, credit and income. It tends to suit owners with a single, known expense who want a predictable payment and would rather not refinance a low-rate first mortgage.

Formula

M = P × r(1 + r)^n / ((1 + r)^n − 1)

M = monthly payment (principal and interest)
P = amount borrowed
r = annual interest rate ÷ 12
n = total number of monthly payments

Example

For example, a $50,000 home equity loan at an illustrative 8% for 15 years has a fixed payment of about $477.83 a month, with about $36,009 in total interest over the term.

How it’s used

One-time projects with a known cost
Consolidating higher-interest debt
Borrowing while keeping a low first-mortgage rate

Strengths and weaknesses

Strengths

Fixed rate and payment
Leaves the first mortgage untouched
Rates are usually lower than unsecured loans

Weaknesses

Interest accrues on the full amount from day one
Closing costs may apply
Adds a second claim on the home and raises foreclosure risk

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.