What happens after you take out a home equity loan, and how does repayment work?

Summary

You get the whole amount at once, secured by your house, and pay it back in equal monthly installments over a set number of years. The rate is usually fixed, and if you still have a mortgage, the new loan sits behind it in line. At Navy Federal's published rates, $50,000 over 10 years runs $597.43 a month; stretching it to 20 years brings the payment down to $429.18 and more than doubles the interest.

One advance, then a schedule

The CFPB describes a home equity loan as borrowing "using the equity in your home as collateral," paid out as a lump sum. It says the rate is usually fixed, and in its comparison with HELOCs notes that the rate may be "fixed or adjustable." Either way, the loan is what the CFPB calls closed-end: you "receive the entire loan amount upfront and cannot redraw after that." Paying it down does not free up anything to borrow again.

Why it is called a second mortgage

If a first mortgage is still on the house, the home equity loan is a second mortgage, and the word refers to the order of repayment. In the CFPB's words, if the home is sold to pay off the debts, "this loan is paid off second." When the sale does not bring in enough to clear both, the second lender can come up short, and the CFPB says that is why second mortgages "often carry higher interest rates than first mortgage loans." Miss payments and the lender can foreclose.

What the term length does

Navy Federal Credit Union publishes fixed-rate equity loans at 5, 10, 15 and 20 years, with floors of 7.340%, 7.650%, 7.950% and 8.350% APR, and pays the closing costs. Using those rates on $50,000:

Term	Monthly payment	Total interest
5 years	$998.10	$9,886
10 years	$597.43	$21,692
15 years	$476.38	$35,748
20 years	$429.18	$53,003

The first payment on the 20-year loan is $429.18, and $347.92 of it is interest. Only $81.26 goes toward the $50,000. On the 5-year loan, the first payment knocks about $692 off the balance. Longer terms cost more twice over: the rate is higher, and the balance shrinks slowly for years. Navy Federal's own example, $100,000 at 8.350% for 20 years, comes to $858.35 a month, within a cent of double the 20-year row.

Fees on either side of the loan

The CFPB points out that home equity loans "may have upfront fees and costs," so the monthly payment alone is a weak basis for comparison. Lenders differ widely here. Regions Bank pays all closing costs but charges a late fee of 5% of the payment, with a $29 minimum and a $100 maximum. Spring EQ charges a lender fee and says there are no prepayment penalties.

Using it to pay off other debt

A long term is also what makes debt consolidation expensive. The CFPB notes that paying off a five-year car loan with a loan against the house can leave you paying interest for ten, fifteen or even thirty years, and the $53,003 in the 20-year row is what that looks like on $50,000. The rest of the CFPB's warning on consolidation is in the guide on when a home equity loan makes sense.

Sources

Written by Kaz (pen name). Figures are copied from providers' published pages on the dates shown. We have not used these products. Corrections: contact form.