A home equity loan lets you borrow a fixed lump sum against the equity in your home, repaid over a set term at a fixed rate. Often called a second mortgage, it sits behind your primary loan and delivers predictable payments from day one.
How does a home equity loan work?
A home equity loan is a second lien layered on top of your existing mortgage. The lender assesses your available equity, credit score, and debt-to-income ratio, then issues a one-time lump sum you repay in equal installments. Because the rate is fixed, your payment covers steady principal and interest across the life of the loan, following a standard amortization schedule.
Sizing the loan against your equity
Lenders use loan-to-value to decide how much you can borrow, usually requiring that your first mortgage and the new home equity loan combined stay within about 80%-85% of the home's appraised value. If your home is worth $400,000 and you owe $250,000, an 85% combined ceiling of $340,000 leaves roughly $90,000 of borrowing room.
- Receive the full amount at closing as a single disbursement
- Repay at a fixed rate over a set term, commonly five to thirty years
- Your first mortgage and its rate remain untouched
- Expect an appraisal, underwriting, and closing costs, though often lower than a full refinance
The predictability makes home equity loans well suited to a known, one-time expense, since you borrow an exact amount and know your payment for the full term.
Home equity loan vs. HELOC and cash-out refinance
The clearest contrast is with a HELOC. A home equity loan gives you a fixed lump sum with a fixed rate, ideal when you know exactly how much you need. A HELOC provides revolving access at a variable rate, better for uncertain or staged spending. Both are second liens that leave your first mortgage in place.
A cash-out refinance differs more fundamentally: it replaces your existing first mortgage with a larger new one rather than adding a second loan. That triggers full closing costs on the entire balance and resets your rate, so it only makes sense when current rates improve on your existing one. A home equity loan preserves a favorable existing rate, which is why homeowners with low first-mortgage rates often choose it over refinancing.
Who should use a home equity loan?
This product suits homeowners with a specific, sizable expense and a preference for certainty over flexibility, such as a major renovation, a wedding, or consolidating high-interest debt into one fixed payment. It also protects a low existing mortgage rate by leaving the first loan alone. Dara users occasionally use the lump sum to fund large one-time transfers abroad, later managing the conversion through a foreign exchange-aware channel.
Pros | Cons |
|---|---|
Fixed rate and fixed payment for predictable budgeting | No flexibility to re-borrow once funds are used |
Full amount available immediately as a lump sum | Adds a second monthly payment on top of your mortgage |
Keeps your first mortgage and its rate intact | Your home is collateral, so default risks foreclosure |
Often lower closing costs than a cash-out refinance | Less efficient than a HELOC if you only need funds gradually |
Before borrowing, confirm the fixed payment fits your budget alongside your existing mortgage, and shop lenders, since rates, terms, and fees on second liens vary considerably.
Frequently asked questions
Yes, a home equity loan is a common type of second mortgage. It sits in second lien position behind your primary mortgage, meaning that lender is repaid after the first if the home is ever sold or foreclosed. That subordinate position is part of why rates can be higher than a first mortgage.
A home equity loan gives you a fixed lump sum at a fixed rate with set payments. A HELOC is a revolving line with a variable rate that you draw from as needed. Choose the loan for a known one-time cost and the line for flexible, ongoing needs.
Most lenders limit your combined first mortgage and home equity loan to roughly 80%-85% of your home's appraised value, though some go higher. Your borrowing room is that ceiling minus your current mortgage balance, adjusted for your credit and income profile.
Yes. A home equity loan is secured by your property, so missed payments can lead to foreclosure just as with a first mortgage. Only borrow amounts you are confident you can repay alongside your existing obligations.
Home equity loans usually involve closing costs such as appraisal and origination fees, though they are often lower than those on a full cash-out refinance. Some lenders advertise reduced or waived fees, so compare total costs, not just the rate, when shopping.
Updated July 21, 2026
Disclaimer
Dara provides this glossary for general educational purposes only. It is not financial, legal, or tax advice, and availability, fees, and terms vary by country and corridor.
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