Home Equity Loans Explained: What Every Homeowner Needs to Know

As a homeowner, you have probably heard about home equity loans before. Maybe you’ve even considered getting one to finance a renovation project or consolidate high-interest debt. However, many homeowners still don’t fully understand what home equity loans are and how they work.

In this guide, we will explain everything you need to know about home equity loans, from the basics of what they are to how you can qualify for one and use the funds.

What is a Home Equity Loan

A home equity loan, also known as a second mortgage, is a type of loan that allows homeowners to borrow money against the value of their property. This means that the collateral for the loan is your home itself. You can think of it as borrowing from yourself, using your home’s equity as collateral.

How Home Equity Loans Work

Home equity loans work by allowing homeowners to borrow a lump sum of money, typically at a fixed interest rate. The amount you can borrow is determined by the amount of equity you have in your home. In other words, it’s the difference between the market value of your home and what you currently owe on your mortgage.

For example, if your home is valued at $300,000 and you still owe $150,000 on your mortgage, you have $150,000 in equity. Depending on the lender’s policies, you may be able to borrow up to a certain percentage of that equity.

Types of Home Equity Loans

There are two main types of home equity loans: traditional home equity loans and home equity lines of credit (HELOCs). Traditional home equity loans provide a lump sum payment, while HELOCs work more like a credit card, allowing you to borrow money as needed up to a predetermined limit.

Some lenders also offer cash-out refinancing as another option for accessing your home’s equity. This involves replacing your current mortgage with a new one for more than you owe, allowing you to receive the difference in cash.

Benefits of Home Equity Loans

One of the main benefits of home equity loans is that they typically have lower interest rates compared to other types of loans, such as personal loans or credit cards. This is because the loan is secured by your home’s value.

Another advantage is that the interest on home equity loans is often tax-deductible, making them a more affordable option for financing large expenses.

How to Qualify for a Home Equity Loan

To qualify for a home equity loan, you will need to have a good credit score and enough equity in your home. In Salt Lake City, home equity loans often require a credit score of at least 620 and an LTV (loan-to-value) ratio of no more than 80%.

Lenders will also consider your debt-to-income ratio, which is the amount of your monthly income that goes towards paying off debts. A lower DTI ratio shows that you have enough income to handle the additional monthly payment for the home equity loan.

Using the Funds from a Home Equity Loan

Home equity loans can be used for a variety of purposes, including home renovations, debt consolidation, education expenses, and more. However, it’s essential to use the funds responsibly and only borrow what you can afford to repay.

Before taking out a home equity loan, consider your financial goals and make sure that using this type of loan is the best option for your situation.


Home equity loans can be a useful tool for homeowners looking to access their home’s equity. However, it’s crucial to understand how they work and carefully consider your financial situation before taking one out. By doing so, you can make informed decisions about using this type of loan and avoid potential financial pitfalls in the future. So, if you are a homeowner with equity in your home, a home equity loan may be worth considering as a potential financing option for your needs.