What Is a Home Equity Loan and When Should I Use One?

A home equity loan, sometimes called a second mortgage, lets you borrow a lump sum using the equity in your home as collateral. Equity is the difference between what your home is worth and what you owe on it. The lender gives you a fixed amount at a fixed interest rate, and you repay it in equal monthly payments over a set term, typically years.

Because the loan is secured by your home, the rates are usually lower than credit cards or personal loans. That lower cost is the trade-off for putting your home at risk: if you cannot repay, the lender can foreclose.

A home equity loan and a home equity line of credit (HELOC) both borrow against your equity, but they work differently. A home equity loan provides the full amount up front at a fixed rate, with predictable payments. A HELOC is a revolving line of credit you draw from as needed, usually at a variable rate, more like a credit card secured by your home.

Choose a home equity loan when you have a known, one-time expense and want predictable payments. Choose a HELOC when you want flexibility to borrow over time, like for ongoing renovations.

Home equity loans make sense for large, purposeful expenses where the lower rate matters. Common uses include major home renovations that add value, consolidating high-interest debt into a lower fixed payment, or funding large predictable costs like a new roof. In each case, the fixed rate and terms bring order to a big expense.

Before borrowing, make sure the repayment fits your budget comfortably and the purpose is genuinely worth putting your home on the line. A renovation that adds value is different from borrowing for a lifestyle purchase.

The central risk of a home equity loan is that your home is the collateral. If you fall behind, the lender can foreclose, which is why these loans demand disciplined repayment. Fees and closing costs also add to the expense, so compare the total cost against other options.

Also think about the market. If home values fall, you could owe more than the home is worth, and an equity loan increases that exposure. Use home equity deliberately, not casually.