A home equity loan (sometimes called a "second mortgage") is a fixed-rate, lump-sum loan secured by your home's equity. You borrow a specific amount, receive it all at closing, and repay it with equal monthly payments over a fixed term (typically 5-30 years). The rate never changes. This makes home equity loans ideal for one-time expenses where you want payment certainty.
Your home is worth $500,000. You owe $300,000 on your first mortgage. Equity: $200,000. Lender max CLTV: 80% = $400,000 total. Max home equity loan: $400,000 - $300,000 = $100,000. You receive $100,000 at closing. At 7.5% fixed for 15 years, your monthly payment is $927. That payment never changes for 15 years, and the interest may be tax-deductible if used for home improvements.
| Feature | Home Equity Loan | HELOC |
|---|---|---|
| Structure | Lump sum | Revolving credit line |
| Rate | Fixed | Variable (usually) |
| Payment | Fixed, predictable | Interest-only in draw period |
| Best For | One-time large expense | Ongoing or uncertain costs |
| Closing Costs | $500-$2,000 | $0-$1,000 |
| Risk | Lower — fixed payment | Higher — rate can rise |
Credit score: 660+ (best rates at 740+).
Combined LTV: Max 80-90% CLTV (first mortgage + home equity loan ÷ home value).
DTI ratio: Max 43% including the new home equity loan payment.
Income verification: Pay stubs, W-2s, tax returns required.
Property: Primary residence preferred. Some lenders allow second homes/investment properties at lower LTV.