How home equity loans and HELOCs work
Equity is the part of the home’s value you own. Borrowing against it puts a lien on the house.
Equity is the home’s value minus what you still owe. A home equity loan or a home equity line of credit lets you borrow against that cushion. In most cases the first mortgage stays in place and the new loan is a second lien.
The money can go toward repairs, other debts, or anything else the lender allows. The house is still the collateral. If you do not repay, the lender can foreclose.
- Home equity line of credit
- Home equity loan
- Second lien
- Combined loan-to-value
Two common products
01
Home equity loan
You receive a lump sum and repay it on a schedule, often at a fixed rate. The payment is predictable. You pay interest on the full amount from the start, even if you do not need every dollar immediately.
02
HELOC
A line of credit lets you draw, repay, and draw again up to a limit during the draw period. The rate is often variable. When the draw period ends, the line usually converts to a repayment phase and the payment can jump.
03
Why the first mortgage matters
A second lien leaves a low-rate first mortgage alone. A cash-out refinance replaces that first mortgage. If the existing rate is already low, replacing it to get cash can raise the rate on the entire balance.
04
How much you can borrow
Lenders cap the combined loan-to-value ratio: the first mortgage plus the new lien, divided by the home’s value. The cap, the rate, and the fees are the lender’s decision after an application and an appraisal or other valuation.
Before you borrow against the house
- A HELOC payment can rise when the index rises, and again when the repayment phase starts.
- Closing costs on a second lien are often lower than a full refinance, but they are not zero.
- Using home equity to pay off credit cards converts unsecured debt into debt secured by the house.
- Compare a second lien with a cash-out refinance only after you know the rate you would be giving up on the first mortgage.
Related guides
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MortgageDirectory.com explains how home loans work. It is not a lender, broker, or quote service, and nothing here is personal financial, tax, or lending advice. Rates, fees, and approvals come from lenders and depend on your situation.