How a home equity loan works
A home equity loan is a fixed-rate second mortgage secured against the equity in your property. You receive a lump sum upfront and repay it through fixed monthly instalments over a defined term. Unlike a HELOC, there is no redraw feature, no revolving line and no separate draw phase.
This makes a home equity loan better suited to a single defined expense, such as a renovation, debt consolidation, education costs or a one-time capital project. The strongest advantage is payment certainty. The strongest trade-off is reduced flexibility because you borrow all at once instead of drawing as needed.
The core underwriting metric is CLTV, or Combined Loan-to-Value. That is the combined balance of your first mortgage and new second mortgage divided by the property value. Many lenders cap second-lien borrowing at 80% to 85% CLTV.
The payment formulas
Gross equity = Home value − first mortgage balance
Lender-available equity = (Home value × max CLTV) − first mortgage balance
Combined LTV = (First mortgage + home equity loan) ÷ Home value × 100%
Monthly payment = P × r(1+r)^n ÷ ((1+r)^n − 1)
Total repayment = Monthly payment × number of months
Total interest = Total repayment − loan principal
This calculator models a standard fully amortising fixed-rate second mortgage. It does not model taxes, lender-specific penalties, variable rates, or revolving borrowing behaviour.
Home equity loan vs HELOC vs cash-out refinance
| Product | Structure | Rate type | Best for | Main trade-off |
|---|
| Home equity loan | Lump-sum second mortgage | Fixed | Known one-time expense, payment certainty | No redraw flexibility |
| HELOC | Revolving credit line | Usually variable | Phased projects, irregular borrowing needs | Rate risk and payment uncertainty |
| Cash-out refinance | Replaces first mortgage | Fixed or variable | Large balance restructure, lower blended rate opportunity | Resets first mortgage and often extends term |
Frequently Asked Questions
What is a home equity loan?+
A home equity loan is a second mortgage secured against your property. You receive a fixed lump sum and repay it through fixed monthly payments over a set term.
How is a home equity loan different from a HELOC?+
A home equity loan is fixed-rate and fully amortising from day one. A HELOC is usually a revolving line with variable rates and more flexible borrowing, but less payment certainty.
How much can I borrow against my home?+
That depends on your property value, first mortgage balance and the lender’s maximum CLTV policy. Many lenders limit total borrowing secured against the home to 80% to 85% of value.
What is CLTV?+
CLTV means Combined Loan-to-Value. It measures your first mortgage plus the new second mortgage as a percentage of the home’s value.
Are home equity loan payments fixed?+
In a standard fixed-rate home equity loan, yes. The required monthly payment normally stays constant over the life of the loan unless your contract has a special feature or you prepay early.
Does paying extra reduce total interest?+
Yes. Extra payments reduce principal faster, which shortens the payoff period and lowers the total interest paid over the life of the loan.
Is a home equity loan better than cash-out refinance?+
It depends on the relative rates, terms, fees and the rate on your existing first mortgage. A home equity loan may be better when your current first mortgage rate is already attractive and you do not want to refinance the whole balance.