What is a Home Equity Loan?
A home equity loan (also called a second mortgage) allows a homeowner to borrow against the equity in their property. The loan is secured by the property, similar to a first mortgage, but sits in second lien position. Home equity loans provide a lump sum at a fixed interest rate with fixed monthly payments over a set term (typically 5-30 years).
The amount you can borrow depends on your available equity and the lender's combined loan-to-value (CLTV) limit. Most lenders allow a CLTV of 80-90%, meaning total borrowing (first mortgage + equity loan) cannot exceed 80-90% of the property's value. If your home is worth $400,000 and you owe $250,000, with an 80% CLTV limit, you could borrow up to $70,000 ($320,000 - $250,000).
Home equity loan vs. HELOC
A home equity loan and a HELOC both use your home as collateral, but they function differently. The equity loan gives you a lump sum at closing with a fixed rate and fixed payments. A HELOC is a revolving credit line you can draw from as needed, typically with a variable rate. Choose a home equity loan when you need a specific amount for a defined purpose. Choose a HELOC when you want flexible access to funds over time.
Tax deductibility
Interest on home equity loans is tax-deductible if the funds are used to buy, build, or substantially improve the home that secures the loan. Interest on equity loans used for other purposes (consolidating credit card debt, buying a car) is not deductible under current tax law. For investors using equity from their primary residence to fund investment property purchases, the interest may not be deductible on the primary residence but the investment property's costs may be deductible as business expenses.
Home equity loans and investors
Real estate investors commonly tap home equity to fund down payments on investment properties, cover renovation costs on flip projects, provide earnest money and proof of funds for acquisitions, or bridge funding gaps between deals. Using home equity is cheaper than hard money (rates are typically 7-12% vs. 12-18%) but carries the risk of losing your primary residence if you default.