A home equity loan is a type of consumer debt that is also known as an equity loan, home equity instalment loan, or second mortgage.

What Is a Home Equity Loan?

Homeowners are able to borrow money against the value of their homes through the use of home equity loans.

The loan amount is determined by the difference between the current market value of the home and the homeowner's mortgage balance due.

Home equity loans are typically fixed-rate, whereas home equity lines of credit (HELOCs) are typically variable-rate.

A home equity loan is essentially the same thing as a mortgage, which is where the term "second mortgage" comes from.

How a Home Equity Loan Work

Home equity secures the loan. The maximum amount a homeowner can borrow will be 80% to 90% of the home's appraised worth.

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After the Tax Reform Act of 1986, home equity loans became popular because they let consumers avoid one of its main provisions.

The borrower is responsible for making regular and consistent payments that cover both the principal and the interest.

If the loan is not paid off, the home may be sold to satisfy the remaining debt, as with any mortgage.

A home equity loan can help you convert home equity into cash, especially if you invest it in home renovations that increase its value.

However, keep in mind that you are putting your home at risk—if real estate values fall, you may end up owing more than your home is worth.