What is a Home Equity Loan and How Does it Work

For many homeowners, a house isn’t just a place to live—it’s also one of the most valuable assets they’ll ever own. Over time, as you pay down your mortgage and your home’s value grows, you build home equity. But did you know that you can tap into that equity to fund major expenses or pursue financial goals? That’s where a home equity loan comes in.

If you’re curious about how a home equity loan works and whether it’s a good fit for your financial needs, you came to the right place.

What is Home Equity?

First, let’s break down what home equity actually is. Home equity is the difference between your home’s market value and the amount you still owe on your mortgage. For example, if your home is worth $400,000 and you still owe $250,000, your home equity is $150,000. Simply put, it’s the portion of your home that you truly own.

Building home equity is one of the biggest financial advantages of owning a property. It grows over time as you make mortgage payments and as your home’s value appreciates. This equity is like a financial safety net—you can use it to secure loans, including a home equity loan.

How Does a Home Equity Loan Work?

A home equity loan allows you to borrow against the equity you’ve built in your home. It’s sometimes referred to as a “second mortgage” because it creates another lien on your property.

Here’s a step-by-step look at how it works:

1. Determine your home equity and borrowing amount

Lenders typically allow you to borrow up to 80% to 85% of your home’s equity. Using our earlier example, if you have $150,000 in equity, you might qualify to borrow up to $127,500.

2. Submit an application

To apply for a home equity loan, you’ll need to provide documentation such as proof of income and details about your home. Lenders will use this information to assess how much you can borrow and at what interest rate.

3. Receive a lump sum

If your application is approved, you’ll receive the loan amount as one lump sum. Unlike a home equity line of credit (HELOC), which allows you to borrow as needed, a home equity loan provides all the funds upfront—making it a great option for major, one-time expenses.

4. Make fixed monthly payments

One of the most appealing features of a home equity loan is its fixed monthly payments. With a fixed interest rate, your payments remain predictable throughout the loan term, giving you peace of mind and full control over your budget.

Advantages of Home Equity Loans

If you’re considering a home equity loan, here are some key benefits to keep in mind:

• Lower Interest Rates

Compared to credit cards or personal loans, home equity loans often have significantly lower interest rates. This makes them a cost-effective way to borrow money.

• Reliable Payments

With fixed monthly payments, you won’t have to worry about fluctuating costs. This predictability helps you plan your finances with confidence.

• Flexibility of Use

From renovating your kitchen to consolidating high-interest debt, home equity loans can be used for a wide variety of financial needs.

Potential Risks of Home Equity Loans

While the benefits are compelling, it’s important to consider the potential risks of taking out a home equity loan:

• Risk of Foreclosure

Since your home is used as collateral, failing to make payments could result in the loss of your property. Carefully evaluate your ability to repay the loan before moving forward.

• Over-Borrowing

Borrowing against your home equity is tempting, but avoid overextending yourself financially. Keep in mind that your home equity is a long-term asset—and dipping into it too often can erode your financial stability.

• Market Fluctuations

If property values in your area decline, you could end up owing more than your home is worth—a situation known as being “underwater.”

Is a Home Equity Loan Right for You?

A home equity loan can be an excellent tool, but it’s not for everyone. Here are a few factors to consider when deciding if it’s the right option for you:

• Do you have a specific, one-time expense, like home renovations or educational costs, that could benefit from a lump sum of cash?
• Are you confident in your ability to make fixed monthly payments over the term of the loan?
• Does borrowing against your home align with your long-term financial goals?

If your answers to these questions are “yes,” then a home equity loan may be worth exploring.

Home equity loans unlock the potential of one of your greatest financial assets—your home. By tapping into your home’s equity, you can access funds for major projects or financial goals while enjoying predictable payments and lower interest rates.

It’s crucial to weigh the benefits against the risks. Take the time to assess your financial situation, and don’t hesitate to seek advice from a financial expert if needed.

If you’re ready to learn more about how a home equity loan could work for you, SCU Credit Union is here to help. We’re committed to empowering homeowners with the tools and knowledge they need to make the best financial decisions.

You can stop in at one of our branch locations for assistance or reach out to our member service call center at 781-784-7725 or toll free at 1-877-661-3300