What Is Home Equity Loan?
A home equity loan lets you borrow against the equity you have built in your property. Unlike a HELOC, which works like a revolving credit line, a home equity loan gives you the entire amount upfront in a single disbursement. The interest rate is fixed, so your monthly payment stays the same for the life of the loan. This makes it easier to budget but less flexible — once you spend the money, you cannot re-borrow without taking out a new loan. Most lenders allow you to borrow up to 80-85% of your home's value minus your existing mortgage balance.
A home equity loan is a second mortgage that provides a lump sum of money at a fixed interest rate, secured by the equity in your home, with predictable monthly payments over a set term.
At a Glance
- Lump sum disbursement at closing — you receive the full amount immediately
- Fixed interest rate and fixed monthly payments for the life of the loan
- Typical rates: 7-10% (higher than primary mortgage, lower than credit cards or hard money)
- Terms: 5-30 years, fully amortizing from day one
- Combined LTV limit: usually 80-85% of home value minus existing mortgage
- Closing costs: 2-5% of loan amount (appraisal, origination, title fees)
How It Works
A home equity loan is structured as a second mortgage — a lien that sits behind your primary mortgage. When you apply, the lender appraises your home, checks your credit and income, and calculates how much equity is available. The standard formula is: home value multiplied by 0.80 or 0.85, minus your existing mortgage balance. That difference is the maximum you can borrow.
Once approved, you receive the full loan amount in a single disbursement. The repayment starts immediately with fixed monthly payments that include both principal and interest — no draw period, no interest-only phase. This is the key structural difference from a HELOC: a home equity loan amortizes from day one, so you are always paying down the balance.
The fixed rate is both the advantage and the limitation. You know exactly what your payment will be every month for the entire term, which makes it easy to factor into your investment property cash flow projections. But if rates drop, you are locked in — you would need to refinance the home equity loan to get a lower rate, which means new closing costs.
For investors, a home equity loan works best when you need a specific, known amount of capital for a single purpose — a down payment on a rental property, a renovation budget, or closing costs. If you need flexible, ongoing access to capital for multiple deals over time, a HELOC is usually the better tool.
Real-World Example
Angela owns a home worth $380,000 with a mortgage balance of $195,000. She has $185,000 in equity. A lender offers a home equity loan at 85% combined LTV:
- Maximum borrowable: ($380,000 × 0.85) - $195,000 = $128,000
- Angela borrows $50,000 at 8.25% fixed for 15 years
- Monthly payment: $484 (fixed for the full 15-year term)
- Closing costs: $1,750 (3.5%)
- Total cost of the loan over 15 years: $87,120 ($37,120 in interest)
She uses the $50,000 as the 20% down payment on a $250,000 single-family rental. The rental generates $1,650/month in rent against a $1,180 mortgage payment and $280 in expenses — leaving $190/month cash flow. After subtracting her $484 home equity loan payment, she is negative $294/month for the first few years.
But Angela's play is long-term: the tenant pays down the rental mortgage, the property appreciates, and in 3 years she plans to refinance the rental at a higher value to pay off the home equity loan entirely. Her home equity loan cost is a known, fixed expense she can plan around — unlike a HELOC where rising rates could increase her payment unpredictably.
Pros & Cons
- Fixed rate and fixed payment — no surprises from rate increases or payment shock
- Predictable budgeting — you know the exact monthly cost for the entire term, making cash flow projections reliable
- Lump sum ideal for one-time capital needs — down payments, renovation budgets, or closing costs
- Lower rates than hard money (7-10% vs. 10-14%) or credit cards (20%+)
- Full amortization from day one means you are building equity in the loan from the first payment
- No revolving access — once spent, you cannot re-borrow without a new loan application and new closing costs
- Closing costs of 2-5% add to the total cost of capital (HELOCs often have no closing costs)
- Your home is collateral — defaulting risks foreclosure on your primary residence
- Less flexible than a HELOC for investors doing multiple deals or staged renovations
- Fully amortizing payments are higher than HELOC interest-only payments during the draw period
Watch Out
The biggest trap is ignoring the total cost of capital. A $50,000 home equity loan at 8.25% for 15 years costs $37,120 in interest. That is real money that must be offset by the investment returns. Run the full analysis: if the rental property generates $190/month cash flow but the home equity loan costs $484/month, you are cash-flow negative until you refinance or pay off the loan. Make sure your exit strategy (refi, payoff from savings, or property sale) is realistic before borrowing.
Compare closing costs carefully. A HELOC typically has zero or minimal closing costs, while a home equity loan charges 2-5%. On a $50,000 loan, that is $1,000-$2,500 in upfront costs that a HELOC avoids. If you are unsure how much capital you need or may need to re-borrow, a HELOC's revolving structure is usually more cost-effective despite the variable rate risk.
Do not forget that this is a second lien on your home. If you default on the home equity loan, the lender can initiate foreclosure — even if you are current on your primary mortgage. Only borrow what you can comfortably service from your existing income, independent of the investment property's cash flow.
Ask an Investor
The Takeaway
A home equity loan is the predictable, fixed-cost way to tap your home equity for investment capital. It works best when you need a specific amount for a single deal and want payment certainty. For investors who prefer to know exactly what they owe every month — and are willing to trade flexibility for stability — a home equity loan is a solid funding tool. But always compare it against a HELOC, cash-out refi, and simply saving the cash to make sure the fixed-rate premium is worth paying.