A couple hugs in their kitchen after completing some home improvement projects using funds from a home equity loan.

How Do Home Equity Loans Work?

A common way that many homeowners borrow money is with a home equity loan. The money you borrow can be used for many different purposes, and the interest rates are usually lower than other borrowing options, like personal loans. The following overview can help you decide if a home equity loan is a good option for your needs.

How a Home Equity Loan Works

Home equity loans are sometimes referred to as second mortgages because you use the equity in your home as collateral. A home equity loan is not a replacement for your current mortgage. It’s a loan that you take out in addition to your mortgage.

Equity refers to the market value of your home less the amount you still owe on it. As homes increase in value over the years, the equity also increases. The principal payments you make on your mortgage and certain home improvement projects also increase equity.

Because your loan is backed by the equity in your home, you will have to pay less in interest than with an unsecured loan, like a personal loan. Home equity loans have fixed interest rates, and you will repay the money you borrow with equal monthly payments.

The repayment terms for these loans vary depending on the amount borrowed but are typically between 5 and 20 years. The amount you can borrow with a home equity loan is usually between 75% and 85% of your home’s equity. 

Common Ways to Use a Home Equity Loan

One of the benefits of home equity loans is that they can be used for many different purposes. The following are a few common uses.

Home Improvement Projects

Home equity loans can be used to remodel your kitchen or bathrooms, have a new roof installed, have your driveway paved, and many other things.

Expensive Purchases

Home equity loans can be used to finance expensive purchases like new appliances, furniture, home electronics, or something else.


With the average cost of a wedding now just over $20,000, most people will need a way to finance the big day. With a home equity loan, you can concentrate on creating a memorable event instead of worrying about how to pay for it.

Debt Consolidation

If you have accumulated debt from multiple high-interest sources, like credit cards, store cards, or something else, you can use a home equity loan to consolidate it. You can then repay the new low-interest loan with predictable monthly payments.

A home equity loan is also a much better option for consolidating debt than a home equity line of credit (HELOC) because it has a fixed interest rate. HELOCs have variable rates that may increase over time, which would make the cost of refinancing higher.

Using a home equity loan to consolidate debt is also preferable to using a HELOC because a nearly maxed-out HELOC  could negatively affect your credit score.

Recreational Equipment

If you enjoy spending time in the great outdoors, a home equity loan can be used to purchase a boat, camper, RV, jet ski, snowmobile, or something else.

How to Get a Home Equity Loan

If you have equity in your home and a good credit score, applying for a home equity loan is a simple process.

Step 1: Determine Your Home’s Equity

The equity you have in your home is the current market value less the mortgage balance. It will determine how much you can borrow. You can estimate your home’s value by comparing it to homes of a similar value that have recently sold in your neighborhood.

Step 2: Check Your Credit Score

Your credit score is an important factor that lenders consider when evaluating you for a home equity loan. A high score, for example, means that you have done a good job of managing your debts in the past. Those with high credit scores usually receive the best interest rates because they are considered low-risk.

Step 3: Apply for a Home Equity Loan

After submitting a formal application, your credit will be checked and your financial history will be reviewed. Depending on the lender, a home appraisal may also be done to determine the market value. It could take several weeks before a loan approval decision is made and you receive the funds.

Advantages of Home Equity Loans

Home equity loans have several important advantages to consider over other types of loans. These are the reasons why they are so popular with homeowners.

Low Interest Rates

Home equity loans are secured loans, and your home serves as the collateral. Secured loans are less risky to lenders than unsecured loans, like personal loans. Because of this, they usually have lower interest rates.

Predictable Monthly Payments

If you are approved for a home equity loan, you will repay it with fixed monthly payments. This helps with budgeting, and it also ensures there will be no surprises if the interest rate goes up.

Tax Benefits

The interest payments on a home equity loan may be tax-deductible as long as the money you borrowed is used to renovate or improve your property. It’s important to keep in mind that the tax laws change every year. Be sure to consult with a tax professional to find out the current rules on home equity loan tax deductions.

Long Repayment Terms

Repayment terms for home equity loans will vary depending on your lender and the amount borrowed but may be as long as 20 years. Longer terms help you keep your monthly payments low.

Home Equity Loans with TEG Federal Credit Union

If you are thinking about tapping into your home’s equity, TEGFCU offers a home equity loan with a low fixed rate and no closing costs. You can borrow between $25,000 and $250,000, and repayment terms of up to 15 years are available.

Learn more about our home equity loans by clicking below.

Home Equity Loans