A home equity loan lets you borrow a lump sum of money using the equity in your home as collateral, and you pay it back in fixed monthly payments over a set term, like a second mortgage. If you fail to repay, the lender can ultimately foreclose on your home, so it is a lower‑interest but higher‑risk way to borrow.

What “home equity” means

  • Home equity is the difference between your home’s current market value and what you still owe on your mortgage.
  • Many lenders let you borrow up to a certain percentage of your home’s value (often around 80–85% combined between your first mortgage and the new loan).

How a home equity loan works step by step

  • You apply with a lender, who checks your credit, income, debts, and how much equity you have.
  • If approved, you receive one lump sum at closing, then repay it with fixed monthly principal and interest over a term that can run up to 20–30 years, separate from your original mortgage.

Home equity loan vs HELOC

  • A home equity loan is a fixed lump sum with a fixed rate and predictable payments, often called a “second mortgage.”
  • A home equity line of credit (HELOC) is revolving credit: you draw as needed during a “draw period” (often 10 years) and then repay during a repayment period, typically with variable rates.

Common uses and key risks

  • Typical uses include debt consolidation, home improvements, education costs, or other large expenses because rates are usually lower than unsecured loans or credit cards.
  • Major risk: your home is collateral, so missing payments can lead to foreclosure; regulators urge borrowers to be sure they can afford the payments and to compare fees, APR, and terms carefully.

Quick pros and cons

  • Pros: Lower interest rates than many unsecured loans, large borrowing limits, fixed predictable payments with a home equity loan.
  • Cons: Your house is on the line, you increase your total housing debt, and closing costs/fees may apply depending on the lender.

Information gathered from public forums or data available on the internet and portrayed here.