The essentials
What is a home equity loan?
A home equity loan advances a lump sum and usually leaves the first mortgage unchanged. Because the home secures repayment, rates may be lower than unsecured credit, but closing costs and foreclosure risk matter.
Do not compare it only with personal-loan APR. Include appraisal, title, recording and closing charges; consider whether the expense should place the home at risk and whether the term outlasts what is being purchased.
How it works
- 01
The lender reviews equity, liens, income, debt and credit.
- 02
A valuation supports the combined loan-to-value calculation.
- 03
The borrower receives a lump sum at closing.
- 04
The loan is repaid separately from the first mortgage.
When it can—and cannot—make sense
Potentially useful when
- The expense is durable and necessary.
- The combined payment is stable and affordable.
- Closing costs are justified by amount and term.
- Emergency reserves remain intact.
Pause when
- Funds cover routine overspending.
- The loan repays unsecured debt without fixing its cause.
- Income is unstable.
- The borrower does not understand lien priority and foreclosure risk.
Costs and risks to count
- APR and interest
- Application, appraisal, title and recording fees
- Early-closure or prepayment terms
- Foreclosure-related charges after default
Mortgage disclosure, rescission and ability-to-repay rules may apply depending on structure and lien position. A right to cancel can apply to certain principal-dwelling transactions.
Questions to ask before signing
What is the combined loan-to-value ratio?
Are closing costs financed?
Is the rate fixed?
Is there an early-closure charge?
What happens if the first mortgage is refinanced?
Location matters
Check the rules in your state
Homestead law, lien recording, taxes, foreclosure procedure, deficiency claims and state high-cost mortgage laws can change the risk and cost.