How do home equity loans work: Rates, terms and repayment

Young couple at table reviewing their home equity loan rates, terms, and repayment details

Key takeaways

With a home equity loan, you can access the equity built up in your home.
Pros of home equity loans include fixed interest rates, fixed monthly payments, and potentially higher borrowing limits. Cons include reducing available equity and the risk of foreclosure.
You may also leverage your equity with a home equity line of credit or cash out refinance.

Please note: Discover® Home Loans offers home equity loans and mortgage refinance opportunities but does not offer HELOCs.

A home equity loan lets you tap into the equity built up in your property. You could use this loan for almost any purpose, including debt consolidation, home improvement, and big-ticket purchases like a dream vacation.

How does a home equity loan work?

Interest rates: Home equity loans typically have a fixed interest rate, meaning your rate will stay consistent for the life of the loan. Many factors are used to determine your interest rate, such as your income, credit history, and debt-to-income (DTI) ratio.
Repayment schedules: When repaying a home equity loan, you usually pay both the loan principal and interest with every payment.
Term lengths: The term length of your loan may determine whether you have a high or low monthly payment. Loans with longer terms tend to have lower monthly payments, while loans with shorter terms tend to have higher monthly payments.

Understanding the basics of home equity loans

A home equity loan is typically a second mortgage that lets you pull cash from the equity in your home. You receive a lump sum payment that you can spend on almost anything you like. Home equity loans typically have a fixed interest rate, loan term, and monthly payment.

Home equity

With a home equity loan, you're borrowing against the equity in your property.

Equity can be calculated by subtracting all debts secured by your home from the current appraised value of your home. For instance, if your home currently has an appraised value of $300,000, and you have a mortgage of $100,000, then you should have $200,000 in equity.

Other loans that tap into home equity

A home equity loan isn't the only way to leverage your equity. You may want to consider a home equity line of credit (HELOC) or cash out refinance instead:

HELOC: This is a revolving line of credit that uses your home as collateral, allowing you to borrow a set amount of money as needed. HELOC loans typically let you draw funds up to a predetermined credit limit over a set amount of time, which is known as a "draw period." During this time, you may have the option to only pay the interest on borrowed funds. You normally then enter a "repayment period," where you pay both the loan principal and interest.
Cash out refinance: With a cash out refinance, you could borrow against the equity in your home and convert it into cash. You refinance your current mortgage with a new one for a higher amount than you currently owe. Then, you receive the difference between these two amounts as a lump sum payment.

Each home equity option is different, so compare each one to find the right product for you. Please note that while Discover Home Loans does not offer HELOCs, we could help you find a home equity loan or mortgage refinance with low, fixed rates.

Home equity loan rates

An interest rate is the amount of interest charged by a lender, expressed as a percentage, for borrowing funds. Home equity loans usually have a fixed interest rate, where the rate stays consistent for the duration of the loan term. Variable interest rates change over time due to market conditions, the economy, and other factors.

Home equity loan term lengths

A loan term refers to the length of time you have to repay a loan. Home equity loan terms may vary depending on the lender and other factors.

How term lengths affect monthly payments

Typically, shorter loan terms have higher monthly payments, and longer terms have lower monthly payments. Loans with shorter terms generally save you money overall because you borrow funds and pay interest for a shorter time.

For example, if you're taking out a $50,000 home equity loan at 8.99% APR, a 10-year repayment term will cost you $633.11 each month, resulting in total payments of $75,973 over the life of the loan. The same amount and interest rate with a 30-year repayment term will cost you $401.95 each month, but you will pay $144,702.57 over the life of the loan.

Home equity loan repayment schedules

A repayment schedule outlines how and when you will repay your home equity loan. Your loan will normally be paid off at the end of the term if you make all payments as scheduled.

Loan-to-value (LTV) ratio

The loan-to-value (LTV) ratio is the amount of your existing loan balance divided by the appraised value of your home. For example, if you have a loan for $100,000, and your home is appraised at $275,000, your LTV ratio is 36% ($100,000 ÷ $275,000 = 36%). Lenders often use this ratio to help determine your eligibility for a home equity loan.

Pros & cons of home equity loans

It's a good idea to compare the advantages and disadvantages of any loan before you decide to borrow money. If you're planning to tap into your equity and use your home as collateral to secure a loan, there are important benefits and risks to consider.

Pros of home equity loans

Fixed interest rates: If your home equity loan has a fixed interest rate, your rate will remain consistent for the entire loan term.
Fixed monthly payments: Payments for a fixed-rate home equity loan will also be consistent for the life of the loan.
Higher borrowing limits: A home equity loan is a secured loan that uses your property as collateral. Depending on the lender, your available equity, and other factors, you may be able to borrow a larger amount of money than with an unsecured loan. For example, Discover offers home equity loans for amounts between $35,000 and $300,000 (2nd Lien).

Cons of home equity loans

Reduces available equity: Taking out a home equity loan may reduce the amount of available equity you have and can tap into. For example, if you currently have $100,000 in available equity and take out a home equity loan for $60,000, you'll then have $40,000 in available equity.
Foreclosure risk: Your home may be at risk of foreclosure if you fail to make payments on your loan.

Getting started with a home equity loan is easy

Discover Home Loans has personal bankers to assess your needs and walk you through the entire home equity lending process. To find out how much you may be able to borrow and what rates, terms, and payment options you may qualify for, apply online in just minutes or call 1-855-361-3435.

This loan amount calculator estimates how much you may be able to borrow if you apply for a home equity loan or mortgage refinance from Discover.

Main: The information provided herein is for informational purposes only and is not intended to be construed as professional advice. Nothing contained in this article shall give rise to, or be construed to give rise to, any obligation or liability whatsoever on the part of Capital One, N.A. or its affiliates.

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Discover Home Loans Restrictions and Details

We do not lend in IA or MD. You are not guaranteed approval. Once you apply and submit your credit and property information, we will confirm your eligibility. We don’t lend on cooperatives, condotels, investment properties, log homes, manufactured homes, mobile homes, or secondary homes. We will only originate one 1st lien mortgage per property per 12-month period. The maximum loan amount you qualify for will depend on additional factors, including type of loan, lien position, loan-to-value and your credit history. We may change rates, program terms, and conditions without notice. Discover Card accounts and other Capital One accounts (with the exception of Discover home and personal loans) may not be paid off with this home loan. All loan programs are offered by Capital One, N.A., 2500 Lake Cook Road, Riverwoods, IL 60015. NMLS ID 453156.