Real Estate Finance
What Is a Home Equity Loan?
A home equity loan — also called a second mortgage — lets homeowners borrow against the equity in their property. Funds are disbursed as a lump sum at a fixed interest rate and repaid in fixed monthly payments. Because the loan is secured by the home, rates are typically lower than unsecured credit.
How Much Can You Borrow?
Most lenders allow borrowing up to 80–85% of the home's appraised value, minus the existing mortgage balance (combined LTV). Example: home value $400,000, mortgage balance $250,000, equity = $150,000. At 80% combined LTV, you could borrow up to $70,000.
Home Equity Loan vs. HELOC
Home Equity Loan
Lump sum disbursement. Fixed interest rate. Fixed monthly payment. Predictable — great for a specific expense with a known cost (home renovation, debt consolidation). Repaid like a regular mortgage.
HELOC
Revolving credit line — draw as needed. Variable interest rate. Payment fluctuates based on balance and rate. Flexible — great for ongoing or uncertain expenses. Draw period followed by repayment period.
Real Estate Exam Key Points
Home equity loans are junior liens (second mortgages) secured by the property
Fixed rate, fixed payment, lump sum — unlike HELOCs which are revolving
Combined LTV determines maximum loan amount
Interest may be tax-deductible if used to improve the home (consult a tax advisor)
Foreclosure risk: defaulting on a home equity loan can result in foreclosure
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