How a home equity loan (HELOAN) works

How does a home equity loan work? You borrow a set amount against the equity in your home, the lender wires it to you at closing, and you pay it back in equal monthly installments over a term of 10 to 30 years. The rate is commonly fixed, so the payment you make in month one is the payment you make in the final month. The loan is recorded as a second lien behind your existing first mortgage, which keeps its rate, its payment and its schedule. If you locked a first mortgage in the 3s and need $60,000 for a specific purpose, a fixed rate home equity loan lets you borrow the $60,000 without repricing the other $300,000. That is why it has become the default tool for homeowners who refuse to give up a low rate.

What a home equity loan is

A home equity loan is a second mortgage. Lenders abbreviate it HELOAN, mostly to keep it from being confused with a HELOC, which is a home equity line of credit. A HELOAN is a loan; a HELOC is a line. Three words describe it. Second, because it sits behind your first mortgage, which is why second-lien rates run higher than first-mortgage rates. Fixed, because the rate is commonly locked for the life of the loan. Amortizing, because every payment includes principal as well as interest, so the balance goes down from the first month and reaches zero on schedule. You cannot re-borrow what you have paid back, and you cannot carry it indefinitely. For a lot of people that is exactly the point.

How the payment works

The lender takes your loan amount, your rate and your term and solves for one payment that, made every month, pays the interest due and retires the balance exactly at the end of the term. Early on, most of each payment is interest. As the balance shrinks, more of the same payment goes to principal. The payment itself never changes. Only the split inside it does.

The home equity loan calculator below lets you enter your own amount, rate and term and see the payment and total interest side by side. The result is an estimate, not a quote and not an approval.

Home equity loan vs HELOC

A home equity loan hands you the full amount at closing at a fixed rate, and you pay interest on all of it from the first day whether you have spent it or not. The payment is the same every month and nothing about it changes when the Federal Reserve moves. It fits a known amount and a known purpose, such as a contractor's bid or paying off specific high-interest debt. Its weakness is that it charges you for money you have not used yet.

A HELOC gives you a credit limit instead of cash. You draw what you need, pay interest only on the balance you carry, and can re-borrow what you repay. The rate is variable, so the payment moves with the market, and when the draw period ends the payment usually jumps. It fits an uncertain amount spread over time. The HELOC guide walks through both phases, and the comparison page puts both next to a cash-out refinance on the same $80,000.

How much you can borrow

Most lenders cap total loans at a share of the home's value. Add your first mortgage balance to the new loan and that total has to stay under the cap. Say the home appraises at $700,000 and you owe $380,000; the room between what you owe and the cap is your ceiling, and it can run well into six figures on a home like that. Every lender sets its own limits; we match you to the one that fits. The equity calculator runs the numbers from your value and balance, and how to pull equity out of your home explains how lenders estimate value before the appraisal comes in.

What lenders look at

• Equity. How much room there is after the first mortgage. More equity means a larger possible loan and usually a better rate.
• Credit. Your score and your history. Every lender sets its own minimum.
• Income. The new payment, on top of your first mortgage and other debts, has to fit comfortably with what you earn.
• Documents. Pay stubs and W-2s or tax returns, a current mortgage statement, and your insurance declaration.

The fastest way to know is a five-minute call: (916) 755-6080, or run the calculator and hit See your options.

If you are self-employed and your tax returns understate your income, there is a version of this loan qualified on twelve months of business bank statements instead, with half of the deposits counted as income. Details are on the bank statement home equity loan page. If the property is a rental you do not live in, there is a version that qualifies on the property's rent rather than your personal income. Details are on the DSCR second mortgage page.

Costs

A home equity loan costs less to set up than a cash-out refinance because the fees are charged on a smaller loan, and the valuation and title work are usually lighter. Expect some combination of a valuation, title and recording fees, possibly an origination fee, and small fixed costs like the credit report. Prepayment penalties are uncommon, but confirm there is none. Some lenders cover the closing costs in exchange for a slightly higher rate. Ask to see both versions.

Who a home equity loan fits

It fits the homeowner with a low first-mortgage rate who needs a specific amount for a specific purpose and wants to know the payment before signing. Debt consolidation is the most common use. Home improvement with a firm bid is next. It also fits anyone who looked at a HELOC and knew they would draw the whole line on day one.

It does not fit someone whose amount is uncertain or who wants a reserve to tap over time. And it does not fit someone whose first mortgage rate is well above today's market, because a cash-out refinance might lower the whole picture at once.

Getting one with us

Unified Home Loans brokers to wholesale lenders and also lends as a correspondent, so a file that does not fit one program can be routed to another instead of being turned down.

1. Check your equity. The equity calculator estimates your available amount in about a minute, with no contact information required.
2. Talk through the fit. Call or text (916) 755-6080. We go over the amount, the purpose, the term, and whether a fixed loan or a line serves you better.
3. Apply and send documents. Income, assets, your current mortgage statement and insurance. Self-employed, we talk about the bank statement version. Rental property, the DSCR version.
4. Valuation and underwriting. The lender orders the valuation, reviews the file, and issues an approval with the amount, rate, term and payment.
5. Sign and fund. After signing and the short rescission period the law requires on a primary residence, the lender wires the full amount.

Fixed home equity loan rates follow longer-term bond yields more than the prime rate. The rate watch below tracks both.