What Is a Home Equity Loan? How Much You Can Borrow

If you've paid down your mortgage or your home has gained value, you may be sitting on equity you can borrow against. A home equity loan is one of the most common ways to turn part of that equity into cash while keeping your current mortgage in place.

Homeowners often use it for renovations, debt consolidation, or other large one-time expenses. Because the loan is secured by your house, it helps to understand exactly how it works, what it costs, and how much you can borrow before you apply.

What Is a Home Equity Loan?

A home equity loan is a loan secured by your home that pays you one lump sum, which you repay in fixed monthly installments over a set term, usually at a fixed interest rate. Because it typically sits behind your existing mortgage, it's often called a second mortgage. Your home is the collateral, so if you don't repay, the lender can foreclose.

How a home equity loan works

Your equity is the difference between what your home is worth and what you owe on it. A home equity loan lets you borrow against part of that difference without replacing your current mortgage.

Here's the mechanical picture:

• One payout: You receive the full loan amount at closing. You can't draw more later; for that, you'd need a new loan or a home equity line of credit.
• Fixed schedule: Most home equity loans have a fixed rate and a fully amortizing payment, so every monthly payment is the same, and the balance reaches zero at the end of the term. Lenders set their own term options.
• Second lien: If you still have a first mortgage, the home equity loan is recorded behind it. If your home is paid off, the home equity loan becomes the first lien.
• Two payments: You keep paying your first mortgage as before and add a separate payment for the home equity loan.
• Paid off at sale: If you sell, both loans are paid from the sale proceeds at closing, first mortgage first.

A home equity loan is closed-end credit, which matters for the protections you get. Under the Truth in Lending Act, closed-end loans secured by real property come with a Loan Estimate shortly after you apply and a Closing Disclosure before you sign, the same standardized forms used for purchase mortgages. A HELOC, which is open-end credit, uses different disclosures.

How much can you borrow with a home equity loan?

Lenders don't lend against all of your equity. They cap your combined loan-to-value ratio (CLTV), which is the total of every loan secured by the home, divided by its appraised value. The maximum loan is what's left under that cap after your existing balance.

Maximum loan = (Home value*Lender's maximum CLTV) - Existing mortgage balance

Worked example:

• Appraised home value: $400,000
• Current first-mortgage balance: $220,000
• Total equity: $180,000
• Lender's maximum CLTV, assumed for this example: 85%
• $400,000 × 85% = $340,000 in total allowable debt
• $340,000 − $220,000 = $120,000 maximum home equity loan

The CLTV cap is a lender policy, not a federal rule, and it varies by lender, credit profile, loan size, and property type. Your income can also limit you below the CLTV ceiling, because the new payment has to fit your debt-to-income ratio. To run your own numbers, use the home equity calculator.

What does a home equity loan cost?

The cost has three parts: the interest rate, upfront closing costs, and the length of time you take to repay.

Payment and total interest by term

A longer term lowers the payment and raises the total cost. The table uses one illustrative rate so the effect of the term is visible on its own.

Term	Monthly principal and interest	Total interest over the full term
10 years	about $607	about $22,800
15 years	about $478	about $36,000
20 years	about $418	about $50,400

Interest rate and APR

Home equity loan rates are usually higher than first-mortgage rates for a similar borrower, because a second lien is paid only after the first mortgage in a foreclosure. They're often lower than unsecured debt such as credit cards, because the home secures the loan.

The APR on your Loan Estimate folds certain fees into one annualized figure, which makes it the better number for comparing offers. No current rate is quoted here because pricing changes daily and depends on your credit, CLTV, loan amount, and term.

Closing costs

Expect some combination of an appraisal or automated valuation, title search, recording fees, origination or underwriting fees, and possibly points. Some lenders reduce or cover certain costs, sometimes in exchange for a higher rate or a requirement to keep the loan open for a minimum period.

Who qualifies for a home equity loan?

There's no single national standard for home equity loan eligibility. Federal law sets one rule under Regulation Z's Ability-to-Repay, a lender must make a reasonable, good-faith determination that you can repay a closed-end loan secured by your dwelling, using verified income, assets, debts, and credit history. Beyond that, each lender sets its own requirements, sometimes called overlays.

What lenders typically evaluate:

• Equity: Enough value above your current balance to stay under the lender's CLTV cap after the new loan.
• Credit history: Minimum scores are lender-specific; higher scores generally get better pricing and higher CLTV limits.
• Debt-to-income ratio (DTI): Your total monthly debt payments, including the new loan, divided by gross monthly income. Maximum DTI is also a lender policy.
• Income documentation: Pay stubs and W-2s, or tax returns and other records for self-employed borrowers.
• Property and occupancy: Primary residences have the most options. Second homes and investment properties are eligible with some lenders, usually with tighter limits.

Scenarios where the answer changes

• You have an FHA or VA first mortgage: FHA and VA don't offer standalone home equity loans, but a private lender can often place a home equity loan behind an FHA or VA first mortgage under its own guidelines. The government-backed alternative is a cash-out refinance, which replaces the first mortgage.
• Your home is paid off: The home equity loan becomes the first lien. You may qualify for a larger amount, since nothing else counts against the CLTV cap.
• It's a rental or second home: Fewer lenders offer home equity loans on non-owner-occupied property, CLTV caps tend to be lower, and the right of rescission described below doesn't apply.

From application to funding

1. Check your numbers: Estimate your home value, current balance, and the payment you can carry.
2. Apply and receive a Loan Estimate: The lender must provide it within three business days of receiving your application.
3. Valuation: Depending on the loan, the lender may order a full appraisal, a limited inspection, or an automated valuation.
4. Underwriting: The lender verifies income, assets, debts, credit, title, and homeowners insurance.
5. Closing Disclosure: You receive final terms at least three business days before you sign. Compare it line by line with your Loan Estimate.
6. Sign: Closing is often done with a notary or at a title office.
7. Rescission period, then funding: On a loan secured by your principal dwelling, federal law gives you until midnight of the third business day after closing to cancel without penalty, under 12 CFR 1026.23. Funds aren't released until that period ends.

Home equity loan vs. HELOC vs. cash-out refinance

All three let you borrow against your home. They differ in how you receive the money and what happens to your first mortgage.

	Home equity loan	HELOC	Cash-out refinance
How you get the money	One lump sum at closing	Draw as needed up to a limit during a draw period	One lump sum at closing
Rate	Usually fixed	Usually variable	Fixed or adjustable
Your first mortgage	Stays in place	Stays in place	Paid off and replaced by a larger loan
Lien position	Usually second	Usually second	First
Federal disclosures	Loan Estimate and Closing Disclosure	HELOC-specific disclosures	Loan Estimate and Closing Disclosure
Right of rescission (primary residence)	Yes	Yes	Yes, with an exception for refinancing with the same lender (new money only)
Best match	A known, one-time cost; preference for a fixed payment	Ongoing or uncertain costs over time	A first-mortgage rate at or above current market rates, or a need to restructure the first loan

Is home equity loan interest tax-deductible?

According to IRS Publication 936, interest on a home equity loan is deductible only if you use the money to buy, build, or substantially improve the home that secures the loan, and only if you itemize deductions. The loan also counts toward the limit on total deductible mortgage debt, which is $750,000 ($375,000 if married filing separately) for debt taken on after December 15, 2017.

In practice, a home equity loan used to add a room or replace a roof may produce deductible interest. One used to pay off credit cards, buy a car, or pay tuition does not. Your tax situation depends on details this article can't see, so confirm with a tax professional before counting on a deduction.

Risks to understand before you borrow

• Your home is the collateral: Missing payments can lead to foreclosure, even if your first mortgage is current.
• Less cushion if values fall: Borrowing up to a high CLTV leaves little equity. If prices drop, you could owe more than the home is worth, which makes selling or refinancing harder.
• Converting unsecured debt to secured debt: Paying off credit cards with a home equity loan can lower your rate, but it turns debt that couldn't cost you your home into debt that can. If the card balances return, you're carrying both.
• Early-payoff terms: Check the Loan Estimate for a prepayment penalty and for any requirement to repay waived closing costs if you pay off early.
• High-cost loan warning signs: Loans whose rates or fees cross federal HOEPA thresholds trigger added protections, including required housing counseling. The Federal Trade Commission warns about pressure to sign quickly, blank documents, and balloon payments.

When a home equity loan tends to fit, and when it doesn't

A home equity loan tends to fit when the expense is known and one-time, when you want a payment that won't change, and when you want to keep a first mortgage with a rate below today's market.

Another option usually fits better when the costs will arrive in stages over several years, when your first-mortgage rate is at or above current refinance rates, when you need a small amount for a short time and closing costs would outweigh the rate benefit, or when your budget can't absorb a second fixed payment through a job loss or rate shock on other debt.

Conclusion

Start with the home equity loan calculator to see your estimated borrowing limit. If the numbers look workable, the Rize Mortgage home equity loan page explains how to apply. A Rize loan officer can compare a home equity loan, a HELOC, and a cash-out refinance against your current first-mortgage rate and give you a Loan Estimate to review.