What is a Home Equity Loan

Your home may be the key to your financial goals. If you’re looking for a way to complete home improvement projects, consolidate debt, or need a vacation, consider a home equity loan! A home equity loan is a lump sum given with a fixed interest rate. Learn how a home equity loan can work for you.

How to Apply

To get a home equity loan, first, we need to determine if your home has equity. Your home’s equity is based on how much your home is worth subtracted by what you still owe on the mortgage. This amount is partially found by completing a home appraisal. An appraisal assesses the value of your home, oftentimes showing your home appreciated in value.

Then, like any loan, you need to qualify. Qualifying comes down to:

  • Credit score history
  • Debt-to-income ratio
  • Available equity in your home

Much like the process when you bought your home, lenders will look at your employment history, credit score history, and other “proof” they need to ensure you have a stable income to take on another line of credit. From there, they’ll determine if you can afford a home equity loan based on your debt-to-income ratio. Your debt-to-income ratio is determined by the total of all your monthly debt expenses by your income. This provides the percentage of how much debt you can handle based on your income.

Lastly, closing costs. While closing costs won’t be as much as when you first bought the home, you’ll still need to put money aside.


Fixed interest rates. While not everyone likes having to pay interest on their loans, at least when they are fixed they are predictable. Alternative home equity options have flexible interest rates where your monthly payment can change from month to month. That’s not the case with a home equity loan.

Easier to qualify. You’ve already bought the home and have proven you can make mortgage payments, so what’s another loan? As long as you can afford it, a home equity loan is easier to qualify for since you already have debt, plus the amount you take out for your home equity loan will be smaller than your mortgage.

Range of terms. Find the financial institution that has the best rates and the best term for your financial success. Many lenders offer a 20-year term, but you can find flexible terms at the credit union level, such as 5-year, 10-year, and 30-year options.

Lump sum. You get the money upfront. Those funds are available to use however you need. Whether that’s to invest back into your home with repairs or improvement projects, consolidate high-interest debt for easier management, or even go on a much-needed vacation, use the funds how you see fit.

The bottom line: which home equity loan is right for you? Essentially, you’ll be taking on a second mortgage which could be a bit much. So before you dive in, evaluate your finances and learn more about your options.