Definition of Home Equity loan, Pros And Cons Complete Guide

home equity loan is a second mortgage loan for you because the first mortgage for you is the home loan with which you have purchased your home. But you can get an additional loan against your home’s current market value. Still, it is under home loan tenure because then you will use the home equity as collateral in a secured loan and also get a large amount than other loans.

Keystone Of Taking A Home Equity Loan

•         A home equity loan, also known as a second mortgage, is a type of collateral consumer debt

•         Home equity loans allow homeowners to borrow against the equity of residence and property

•         Home equity loan amounts are based on the difference between a home’s current market value after renovation or real estate value increase and the homeowner’s mortgage balance due

•         There are two varieties of home equity loans: fixed-rate loans and home equity lines of credit (HELOCs).

•         Fixed-rate home equity loans provide a high amount of money, whereas HELOCs offer borrowers are revolving lines of credit.


Having a home equity loan is equivalent to a mortgage with the name of a second mortgage. The borrower will provide home equity as collateral to the lender. Then the amount of money that can be borrowed against the home equity will be based partially on a combined loan-to-value (CLTV) ratio of 80% to 90% of the home’s appraised market value. Hence there is also a key factor of credit score and payment history according to which the amount of the loan and the rate of interest charged.

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Just like a conventional mortgage, home equity loan repayment is set in the same traditional way as regular, fixed payments covering both principal and interest. While if you can’t pay back the loan amount in proper time, the remaining debt will be satisfied by selling the house as done with any mortgage.

A home equity loan is the best way to build up cash that you have invested in your house renovation because it increases your home market value, but also keep in mind that if the real estate goes down, you could end up owing more than your home is worth.

Suppose you want to relocate and lose money on the sale of your home or cannot move. Before ending up in jeopardy of your house, do all the options available for you.

Features of Home Equity Loans

Low-Interest Rates

As compared to that other loans such as personal loans, business loans, and credit card loans, the home equity loan interest rate is low. The secured nature of this loan makes it cheaper as the home is a mortgage; it will clear your debt in your crisis which gives the lender the satisfaction of lending money at a low-interest rate.

Can be opted for High Loan Amount.

Generally, the lender is giving you the loan on your share of the property, so the amount of loan you are borrowing depends on the share of your property. While if you take a high loan amount on a personal loan, then you have to pay more interest compared to this

Easily Approved

The home equity loan is more easily approved than other loans such as personal loans, business loans, and credit card loans because here, the home is the collateral against the amount the lender is providing to you, so they don’t crosscheck so much information you are providing to them. In case you fail to repay, the lender has the authority to recover from your collateral, that means your home.

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Potential Tax Benefits.

The home equity loan can be availed by some borrowers for the tax benefit, but in that case, it completely depends on the reason behind borrowing and any terms and conditions involved in this.

Closing Cost

all other loans such as personal loans, business loans, and credit card loans, the home equity loan also has some closing charges but depends on the lender to lender because some of them add their there interest rate while their also some other dependence of closing cost such as appraised value, loan amount and so on.

Advantages of a Home Equity Loan

1. It has low-interest rates than other loans. They also typically come with a low fixed interest rate which is being provided by the lender.

2. It is a way to get a high amount of money in a short time in exchange for your home

3. It is a fixed-rate loan that is secured by your home value because it is a mortgage for the consumer.

4. The loan may be tax deductible, which means it is removed from the taxable income, hence lowering the overall tax expense liability, but it also has some rules involved in it

5. You are paid in cash by the lender when you take up a home equity loan.

6. It is advantageous for the lender as lenders have a tangible asset they can repossess. In case the borrower fails to repay the debt, the lender automatically gets possession of the house as it has been given collateral of the amount.

Disadvantages of a Home Equity Loan

1. You are at risk of losing your home to the financial institution or lender if you fail to repay the debt.

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2. Don’t consider a home equity loan if you are making risky financial decisions because it wouldn’t be beneficial for you. The amount of credit will increase from time to time, and the lender will take possession.

3. Although it is an easy way to get money to pay off loans or to get a student loan, the borrower might sink even deeper into debt if they take up a second mortgage loan to pay off the first mortgage and so on; nothing will happen it will benefit the lender only

4. There is a very high chance of facing bankruptcy if you take out a home equity loan that’s worth more than the net worth of your house.

5. Child education is a good reason to tap into home equity loans, but borrowers nearing retirement should reconsider this option as they may not have a way to repay the debt later on.

Home Equity Loan
Pros Easy to obtain , so you can have the cash when you need itEasy to obtain , so you can easily go into more debt
Lower interest rates than other debtPossible spiraling debt – hence why ” easy to obtain ” is also a con
Possible tax deduction for interest paidCan lead to home foreclosure

Home Equity Loan Requirements

For getting a home equity loan generally, the requirements lender told you to provide are:-

•         The value of equity must be 20% greater than the home market value

•         Income history of two or more years will be checked for verification

•         The required credit score must be greater than 600

Average Home Equity Loan Interest Rates
Loan TypeAverage RateRange
15-year fixed5.82%2.99%–9.03%
10-year fixed5.60%2.99%–9.99%
5-year fixed5.28%2.50%–9.99%
HELOC        5.61%3.50%–8.63%
Average Home Equity Loan Interest Rates


If you want to take a home equity loan, then you first need to weigh all factors. Then comes the requirement of taking a loan because keeping your house as a mortgage is a big decision whether you are capable of repayment or not; please check it by doing income expenses. After doing all these then, only consult the lender for the best deals.

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