Your home isn’t just a place to live — it’s one of the most powerful financial tools you own.
As you pay down your mortgage and your property value grows, you build equity, which can be used to fund renovations, pay off debt, or invest in new opportunities.
That’s where a home equity loan comes in.
Let’s break down how it works, how to qualify, and whether it’s the right move for you.
What Is a Home Equity Loan?
A home equity loan (often called a second mortgage) lets you borrow money against the equity you’ve built in your home.
It doesn’t replace your current mortgage — it adds a second one, typically with a fixed interest rate and predictable monthly payments.
How Much Can You Borrow?
Most lenders allow you to borrow up to 85% of your home’s value, minus what you still owe on your mortgage.
Because this second loan is subordinate to your first mortgage, interest rates are usually slightly higher.
Home Equity Loan vs. HELOC: What’s the Difference?
While both a home equity loan and a home equity line of credit (HELOC) let you tap into your home’s value, they work very differently.
| Feature | Home Equity Loan | HELOC |
|---|---|---|
| Structure | Lump-sum loan | Revolving line of credit |
| Interest Rate | Fixed | Variable |
| Payments | Fixed monthly installments | Flexible during draw period |
| Use of Funds | One-time need (e.g., renovation, debt payoff) | Ongoing access for future expenses |
| Term | Up to 30 years | Typically 10-year draw + 20-year repayment |
With both, your home is collateral — meaning failure to make payments could result in foreclosure. That’s why choosing the right option for your goals is critical.
How a Home Equity Loan Works
When your loan closes, you receive the full approved amount as a lump sum.
From there, you make fixed monthly payments (covering both principal and interest) over a set term — usually between 10 and 30 years.
- A shorter term means higher monthly payments but lower total interest.
- A longer term means smaller monthly payments but more interest over time.
This predictability makes home equity loans a strong option for borrowers who want consistent payments and a clear payoff schedule.
When Should You Consider a Home Equity Loan?
You may be a good candidate if you have:
- At least 15–20% equity in your home
- A credit score above 660 (for best rates)
- A debt-to-income (DTI) ratio under 43%
- Steady income and documentation (W-2s, tax returns, or proof of self-employment income)
Lenders typically limit the combined loan-to-value (CLTV) — your existing mortgage plus the new loan — to 85% of your home’s appraised value.
How to Apply for a Home Equity Loan
Applying is easier than most homeowners expect. Here’s how to get started:
- Evaluate Your Finances
Review your credit report, calculate your current equity, and decide how much you need to borrow. - Gather Your Documents
Most lenders require proof of income, mortgage statements, pay stubs, and tax returns. - Get Pre-Approved Online
With Lexford Financial, you can start your application digitally — get real rates and lending options in minutes. - Home Appraisal
Your lender orders an appraisal to confirm your property’s current market value. - Close and Receive Funds
Once approved, you’ll get your loan as a lump sum — and start making predictable monthly payments.
How Much Can You Borrow?
To estimate how much you might qualify for:
(Home Value × 0.85) – Remaining Mortgage Balance = Maximum Loan Amount
Example:
If your home is worth $200,000 and you owe $100,000:
→ $200,000 × 0.85 = $170,000
→ $170,000 – $100,000 = $70,000 available in potential equity.
Benefits of a Home Equity Loan
- Use your funds for anything — from home improvements to debt consolidation.
- Receive a lump sum immediately after closing.
- Fixed payments and rates provide long-term stability.
- Potential tax deductions if used for qualified home improvements.
- Lower rates than most personal loans or credit cards.
Drawbacks to Consider
- You’ll have two mortgages (your original + this new one).
- Your home is collateral, meaning nonpayment could risk foreclosure.
- Closing costs typically apply (2–5% of loan amount).
- Less flexibility than a HELOC — you can’t withdraw funds multiple times.
Smart Ways to Use a Home Equity Loan
Home equity loans can serve countless purposes, but some of the most common include:
- Home Renovations: Upgrade kitchens, add rooms, or remodel to boost property value.
- Debt Consolidation: Pay off high-interest credit cards or personal loans.
- Education Costs: Fund college tuition or vocational programs.
- Major Life Expenses: Weddings, medical costs, or starting a small business.
Your home’s equity gives you the flexibility to pursue new goals — without resorting to high-interest credit.
Get Expert Guidance from Lexford Financial
At Lexford Financial, we make it simple to unlock your home’s value.
Our platform connects you with multiple top lenders — so you can compare offers, choose the best terms, and get funded faster.
✅ Get personalized loan options in minutes
✅ Access transparent rates and expert guidance
✅ Tap into your home equity with confidence