Here's How a Home Equity Loan Works
Harness your home's equity for things like home renovations, college tuition, or other major expenses.
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Credit: Konstantin L / Shutterstock
If you're a homeowner with equity built up in your house, you may be able to tap into that equity through a home equity loan. A home equity loan allows you to borrow money by using your home's value as collateral for the loan. Here's a step-by-step look at how these loans work.
How does a home equity loan work?
1. Determine your home equity
Home equity is calculated by taking the current market value of your home and subtracting the outstanding balance on your mortgage. For example, if your home is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in home equity.
2. Apply for the loan
You'll need to apply for a home equity loan from a bank, credit union, or online lender just like you did for your original mortgage. The lender will look at your income, credit score, employment status and outstanding debts to determine your creditworthiness and maximum loan amount.
3. Establish the loan amount
Most lenders will let you borrow up to 85% of your home's equity. From the example above with $100,000 in equity, you may be able to borrow up to $85,000 with a home equity loan.
4. Receive lump sum payment
Unlike a home equity line of credit (HELOC) where you borrow as needed, a home equity loan provides the funds as a lump sum upfront after closing on the loan.
5. Make monthly payments
You'll repay the loan over a fixed term, such as 10 or 15 years, with a fixed interest rate and equal monthly payments, just like a typical mortgage. Home equity loans are installment loans with a definitive payoff date.
6. Maintain mortgage payments
Your home equity loan is separate from your original mortgage. You'll need to continue making your regular mortgage payments on top of the new home equity loan payments.
Home equity loans allow you to access some of your home's equity for things like home renovations, debt consolidation, college tuition, or other major expenses. Just keep in mind your home secures the debt, so defaulting could put you at risk of foreclosure.
Meredith Dietz
Senior Finance Writer
Meredith Dietz is Lifehacker’s Senior Finance Writer. She earned her bachelor’s degree in English and Communications from Northeastern University, where she graduated as valedictorian of her college. She grew up waitressing in her family restaurant in Wilmington, DE and worked at Hasbro Games, where she wrote rules for new games. Previously, she worked in the non-profit space as a Leadership Resident with the Harpswell Foundation in Phnom Penh, Cambodia; later, she was a travel coordinator for a study abroad program that traced the rise of fascist propaganda across Western Europe.
Since then, Meredith has been driven to make personal finance accessible and address taboos of talking openly about money, including debt, investing, and saving for retirement. Outside of finance writing, Meredith is a marathon runner and stand-up comedian who has been a regular contributor to The Onion and Reductress. Meredith lives in Brooklyn, NY.
