You have been paying your mortgage for eight years and the balance has dropped while the house has appreciated. The equity sitting in your walls is real money that you cannot spend. A home equity loan turns that equity into a lump sum of cash with a fixed monthly payment that does not change for the life of the loan. The payment is predictable, the rate is usually lower than a credit card or personal loan, and the consequence of not paying it is the same as not paying your first mortgage. The bank can take your house.
A home equity loan is a second mortgage. It sits behind your primary mortgage in the lien priority stack, which means the first mortgage lender gets paid first if the house is foreclosed. Because the second lender takes more risk, the interest rate on a home equity loan is higher than the rate on a first mortgage, typically by one to three percentage points. The loan is issued as a single lump sum, repaid in fixed monthly installments over a set term, usually five, ten, fifteen, or twenty years. There is no draw period. You get the money once and the payments start immediately.
Home Equity Loan vs HELOC — Same Collateral, Completely Different Payment Structure
A home equity line of credit, or HELOC, is also a second mortgage secured by your house. The similarity ends there. A HELOC is a revolving credit line with a variable interest rate and two distinct phases. During the draw period, typically ten years, you can borrow money as needed up to your credit limit, and your minimum monthly payment often covers only the interest. During the repayment period, typically the next ten to twenty years, you can no longer draw funds and you must repay the outstanding balance with fully amortizing payments. The payment on a HELOC can change monthly because the interest rate floats with the prime rate, and it can jump sharply when the draw period ends and principal repayment begins.
A home equity loan has none of this uncertainty. The rate is fixed. The payment is fixed. The term is fixed. You know exactly what you will pay every month from the first payment to the last. The trade-off is that you cannot borrow more later without applying for a new loan, and you start paying principal from day one instead of enjoying an interest-only grace period. For a homeowner who knows exactly how much money they need and wants a payment that fits into a predictable monthly budget, the home equity loan is the simpler instrument. A HELOC is a credit card with your house as collateral. A home equity loan is a second mortgage in the traditional sense of the word.
| Feature | Home Equity Loan | HELOC |
| Payout | Single lump sum | Revolving credit line |
| Interest rate | Fixed | Variable (usually prime + margin) |
| Monthly payment | Fixed, fully amortizing | Interest-only during draw; rises in repayment |
| Best for | One-time expense with known cost | Ongoing or uncertain expenses |
| Rate premium over first mortgage | 1–3% | 0.5–2.5% |
How Monthly Payments Are Calculated — The Same Math as Your Primary Mortgage
A home equity loan uses the same amortization formula as a standard thirty-year mortgage. The payment is calculated so that every dollar of principal and every dollar of interest adds up to zero on the final payment date. The interest portion is highest in month one and lowest in the final month, because interest is calculated each month on the remaining balance. The rate is fixed, so the monthly payment never changes.
Take a fifty-thousand-dollar home equity loan at eight percent for fifteen years. The monthly principal-and-interest payment is about four hundred and seventy-eight dollars. In the first month, about three hundred and thirty-three dollars goes to interest and a hundred and forty-five dollars to principal. By the final year, over four hundred and fifty dollars of the payment goes to principal and less than thirty dollars to interest. You will pay roughly thirty-six thousand dollars in total interest over the fifteen-year term on top of the fifty thousand you borrowed.
Shorten the term to ten years at seven and a half percent and the payment rises to about five hundred and ninety-four dollars, but total interest drops to roughly twenty-one thousand dollars. Extend the term to twenty years at eight and a half percent and the payment falls to about four hundred and thirty-four dollars, but total interest climbs to about fifty-four thousand dollars. The relationship between term and total cost is not linear. Every extra year on the back end carries a steep interest penalty because the balance declines more slowly and interest accrues on a higher balance for longer.
The Three Factors That Determine Your Payment
The loan amount is the simplest variable. A thirty-thousand-dollar loan costs roughly sixty percent of what a fifty-thousand-dollar loan costs, all else equal. The maximum loan amount is limited by your combined loan-to-value ratio, or CLTV. Most lenders cap CLTV at eighty or eighty-five percent, meaning your primary mortgage balance plus the home equity loan balance cannot exceed eighty to eighty-five percent of the home’s current appraised value. A four-hundred-thousand-dollar house with a two-hundred-and-fifty-thousand-dollar first mortgage has a CLTV of sixty-two and a half percent, leaving room for a home equity loan of up to about seventy to ninety thousand dollars depending on the lender’s cap.
The interest rate depends on your credit score, your debt-to-income ratio, the loan amount, and the term. A borrower with a credit score above seven hundred and forty and a debt-to-income ratio below thirty-six percent gets the best available rate. A borrower with a score below six hundred and eighty may not qualify at all, or may be offered a rate several points higher. The rate on a home equity loan is always higher than the rate on a first mortgage for the same borrower because the second lender stands in line behind the first lender in a foreclosure. The gap between a first mortgage rate and a home equity loan rate widens when the borrower’s credit profile weakens.
The term determines both the monthly payment and the total interest cost. The most common terms are ten and fifteen years. Five-year terms exist for smaller loans and produce high payments with low total interest. Twenty-year and thirty-year terms exist for larger loans and produce lower payments with substantially higher total interest. Choosing a longer term to lower the monthly payment is financially expensive in the long run, but it may be the only way to keep the payment within a budget that already includes a first mortgage, property taxes, insurance, and the expense that the home equity loan is funding.
| Loan amount | Term | Rate | Monthly P&I | Total interest |
| $30,000 | 10 years | 7.5% | ~$356 | ~$12,700 |
| $50,000 | 10 years | 7.5% | ~$594 | ~$21,300 |
| $50,000 | 15 years | 8.0% | ~$478 | ~$36,000 |
| $50,000 | 20 years | 8.5% | ~$434 | ~$54,100 |
| $75,000 | 15 years | 8.0% | ~$717 | ~$54,000 |
How a Home Equity Loan Payment Fits Into Your Monthly Budget
Add the home equity loan payment to your existing mortgage payment. If your first mortgage is sixteen hundred dollars a month and your home equity loan is four hundred and eighty dollars, your total monthly housing payment before taxes and insurance is twenty hundred and eighty dollars. Lenders evaluate your ability to repay based on your total debt-to-income ratio, including both mortgage payments, any other debts, and the new home equity loan payment. If your total monthly debt payments exceed forty-three percent of your gross monthly income, most lenders will deny the application regardless of your credit score.
The interest on a home equity loan may be tax-deductible if you use the proceeds to buy, build, or substantially improve the home that secures the loan. If you use the money to pay off credit cards, fund a vacation, or cover a child’s tuition, the interest is not deductible. The Tax Cuts and Jobs Act of 2017 narrowed the deduction to acquisition indebtedness only, meaning the loan must be used for the home itself. The deduction is also subject to the overall limit on mortgage interest, which applies to the combined balance of your first mortgage and home equity loan up to seven hundred and fifty thousand dollars for married couples filing jointly. Verify your specific situation with a tax professional before counting on the deduction.
A home equity loan is secured by your house. If you stop making payments, the lender can foreclose. The first mortgage lender gets paid first from the foreclosure sale proceeds. The home equity lender gets whatever remains. If the house sells for less than the combined balance of both loans, the second lender may pursue a deficiency judgment depending on state law. A home equity loan turns illiquid equity into spendable cash at the cost of a new monthly obligation secured by the place you live. The payment is fixed. The consequence of missing it is not.
FAQ — Home Equity Loan Payments
Why is a HELOC payment so much lower than a home equity loan payment?
Because most HELOCs require only interest payments during the draw period. A fifty-thousand-dollar HELOC at eight percent costs about three hundred and thirty-three dollars a month in interest-only payments. The same amount as a fifteen-year fixed home equity loan at eight percent costs about four hundred and seventy-eight dollars because it includes principal repayment from day one. The lower HELOC payment is temporary. When the draw period ends and the repayment period begins, the payment will rise to cover both principal and interest over the remaining term, and it may be higher than the home equity loan payment because the repayment term is shorter.
Can I pay off a home equity loan early?
Most home equity loans have no prepayment penalty, but some lenders charge a fee if you pay off the loan within the first two to five years. The fee is typically a percentage of the outstanding balance or a fixed number of months of interest. Read the loan estimate and the promissory note before signing. If the loan has a prepayment penalty, the terms must be disclosed on the loan estimate under the prepayment penalty section. If you plan to sell the house or refinance within a few years, avoid any loan with a prepayment penalty.
What determines the interest rate on a home equity loan?
Five factors in descending order of importance: your credit score, your combined loan-to-value ratio, your debt-to-income ratio, the loan term, and the loan amount. A credit score above seven hundred and forty, a CLTV below seventy percent, and a debt-to-income ratio below thirty-six percent will get you the best rate from any lender. The loan term has a counterintuitive effect: shorter terms often carry slightly lower rates, which amplifies the interest savings from the shorter amortization. A ten-year loan at seven and a half percent costs far less in total than a twenty-year loan at eight and a half percent, both because the rate is lower and because the term is shorter.
