How Does a Home Equity Loan Work?

Fixed rate, simple interest home equity loans, can be secured by a first or second lien on the title deed of a residential home. The amount of home equity that is available for a loan is determined by the difference between the appraised value of the property, and the balance on the first mortgage.

With a fixed rate home equity loan, the lender makes a one-time payment of the full amount that is borrowed, which is paid to you at the closing of the loan process. If you have an existing second mortgage, line of credit, or equity loan on your home, it will need to be paid off with the proceeds of your new loan, so be sure to request a sufficient amount of money to include the existing loan.

The available loan programs can vary, and the maximum loan to value, depending on the specific lender. Other options can include a zero cost loan, or loans for borrowers with bad credit, which usually require more equity. Home equity rates can vary depending on risk factors such as, credit scores, the amount of the loan, and the loan to value.

Tax deductible home equity loan interest provides an additional incentive to pay off high interest debts, make home improvements, or take cash out. When a loan is secured by a lien on your primary home, the interest payments may be tax deductible within allowed limitations, which can be the lesser of $100,000 or a maximum 100% of the home value.

Loan terms can range from 10, 15, 20, or 30 years. A longer term provides a lower monthly payment, but also means you will pay more interest over the life of the loan. For example, the payment on $100,000 for 30 years may be about $200 less per month than a 15 year term, however, the interest charges could be more than double, if paid over the full 30 year term.