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If you own a home and make monthly mortgage payments, you’ve probably built up some home equity. Our mortgages team has thoroughly researched home equity loans (also known as a second mortgage), which can help you tap into that equity. You can use that money for anything including renovations, paying off debt or college.
A home equity loan works the same way as other secured personal loans. When you apply, provide details of your mortgage, your personal financial position and the reason you’re taking out the loan. If you’re approved, your loan is based on your equity and how much you can afford to repay.
The equity in your home is used as collateral for the loan, so if you default, the lender could recoup its losses by taking ownership of that equity.
Read our guides to understand more about how borrowing from your home equity works:
A home equity loan has similar fees as your first mortgage. Fees vary from lender to lender, but you should expect closing costs to range from 2% to 5% of the loan amount. A few common fees include:
Home equity is essentially the difference between your property’s value and any debt you hold against it. Typically, you can borrow up to 80% to 90% of your home’s value, minus the debt you hold against it. For example, if your home is worth $500,000 and you’ve paid off $300,000, you’ll have $200,000 left on your mortgage. Here’s how much you could borrow with a home equity loan in that scenario:
The types of loans available when using your equity give you real flexibility:
Not quite. While both types of financing draw from your equity as a source of collateral, a HELOC functions more like a credit card. You have a large amount of money you can draw from at any time for the loan period, usually five to 15 years.
A home equity loan usually has the same repayment period, but you’re advanced the lump sum immediately. Because of this, you must pay interest on the entire amount (like a regular mortgage). On the other hand, if you take out a HELOC, you only have to pay interest on the amount you borrow from the possible pool of funds — say $50,000 of the total $100,000.
While the loans are secured, there aren’t many restrictions on how you use your loan. You can use the money for:
No. If you decide to apply with a different lender you’ll need to provide details of your mortgage, including your total loan and how much equity you hold.
This is a risky type of loan should you default. Failing to repay the loan could result in the lender taking the equity you have in the property to pay the loan. Before you apply, consider how financially stable you are and if this is the right type of loan for you to take out.
A home equity loan can offer you a low-interest rate as well as a flexible way to finance a personal purchase.
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