Home equity loans: Pros, cons, and when to use one

Written by Samantha SheltonNMLS 1647301Updated September 2026

Couple at a kitchen table weighing the pros and cons of a home equity loan in their Michigan home

A home equity loan is a fixed-rate second mortgage that pays your equity out as a single lump sum, and across the lenders in Align Lending’s network it costs roughly 2% – 5% of the loan amount to close. The trade is blunt: you get a rate far below a credit card, a payment that never moves, and a federal right to cancel until midnight of the third business day after you sign, in exchange for putting your house up as collateral.

That collateral is the whole story. It is why the rate is low, and why a bad year at work can turn a kitchen remodel into a foreclosure notice. The equity is real money, U.S. households held $47.9 trillion of owner-occupied real estate against $13.8 trillion of mortgage debt at the end of 2025, but borrowing it turns an asset you own into a debt you service.

Learn how a home equity loan works, the five things it does well, the five ways it goes wrong, and how it compares with a HELOC and a cash-out refinance. Still deciding among the three? Start with our Home Equity guide.

Key takeaways:

How it works: A home equity loan is a fixed-rate lump sum secured by your house, repaid on a set schedule that commonly runs 5 – 30 years, with a monthly payment that never changes.
The real cost: Closing costs run about 2% – 5% of the loan amount, which is $1,000 – $2,500 on a $50,000 loan and the reason this product rarely makes sense for a small or short-term expense.
The core risk: Your home is the collateral, and lenders in Align’s network typically cap your first mortgage plus the new loan at 80% – 85% of value, so borrowing to that ceiling leaves almost nothing between you and a price dip.

What is a home equity loan?

A home equity loan is a closed-end second mortgage that lets you borrow against the difference between what your home is worth and what you still owe, paid out in one lump sum at a fixed rate and repaid in equal monthly installments. It sits behind your first mortgage in lien position and does not touch that loan’s rate or term.

The math starts with equity: appraised value minus every mortgage balance already recorded against the property. A $300,000 home with a $180,000 first mortgage carries $120,000 in equity, and you cannot borrow all of it. Lenders in Align’s network generally cap the combined loan-to-value ratio, both loans divided by appraised value, at 80% – 85%, leaving a cushion that protects them if values slip and keeps you from being trapped.

Three details separate it from the alternatives: the rate is fixed, the money arrives once rather than as a line you draw against, and because it is closed-end credit secured by real property it comes with a Loan Estimate and a Closing Disclosure, the same standardized forms as your purchase mortgage, which makes competing offers directly comparable.

What are the advantages of a home equity loan?

Five advantages do nearly all the work, and for most borrowers the first outweighs the other four combined.

A secured rate, not a signature rate: Because your house backs the debt, the lender’s exposure is low and pricing reflects it. Home equity loans price well below credit cards and unsecured personal loans, which is why people use them to retire revolving balances. Use the Freddie Mac Primary Mortgage Market Survey as your rate reference, not a figure quoted in an article.
A payment that never moves: The rate is fixed for the life of the loan, so the payment in month one is the payment in month 120. The biggest structural difference from a HELOC, where the rate is usually variable and the payment can jump when the draw period ends.
Easier approval than unsecured credit: Collateral widens the box. Lenders in Align’s network generally look for a credit score around 620 or higher on second-lien products, below what the same borrower would need unsecured for the same amount.
Interest that can be deductible for exactly one use: Under current federal rules you can no longer deduct interest on a loan secured by your home to the extent the proceeds weren’t used to buy, build, or substantially improve that home, and it only helps if you itemize. Acquisition debt is capped at $750,000 ($375,000 if married filing separately) for debt incurred after December 15, 2017. Read the IRS rules on deducting home mortgage and equity interest before assuming a renovation loan pays for part of itself, and talk with a tax professional.¹
A fixed amount you cannot quietly overspend: One disbursement, one balance, one payoff date. A line of credit invites the balance to creep back up; an amortizing lump sum does not. For debt consolidation that closed structure is a feature, see using home equity wisely for how to keep old balances from refilling.

What are the risks of a home equity loan?

Five risks deserve real weight, and four trace back to one fact: the lender can take the house. A second-lien holder sits behind your first mortgage in priority, but it still holds a mortgage on your home and can foreclose on it.

Foreclosure risk is not theoretical: Missing payments puts the home in play even if the first mortgage is current. That is the price of the low rate, and why the right question is never “how much will they approve” but “what payment survives a six-month income disruption.”
Closing costs make small loans expensive: At 2% – 5%, a $50,000 loan costs $1,000 – $2,500 to close (origination, valuation, title, credit, recording and notary fees) and those dollars buy nothing but the loan. On a $15,000 short-term need that is indefensible; on a $75,000 renovation held a decade it is a rounding error.
You shrink the cushion that protects you: Add a $75,000 second to a $300,000 home carrying a $180,000 first and equity falls from $120,000 to $45,000, so a 10% price decline erases most of what’s left. Being underwater blocks a future refinance and can force you to bring cash to a sale.
Two mortgage payments, one budget: The new payment lands on top of the existing one, and every lender measures the total against your income. As the CFPB explanation of debt-to-income ratio puts it, DTI is all your monthly debt payments divided by gross monthly income, and different products and lenders set different limits. Push past one ceiling and the next loan you apply for gets harder.
Long amortization on a short-lived purchase: A 20-year repayment on a vehicle, a wedding, or a vacation means paying long after the thing is gone, with your house on the hook. Match the term to the useful life of the purchase, or don’t borrow this way.

Those trade-offs shift with the product, so here are all three side by side.

Home equity loan vs. HELOC vs. cash-out refinance

These are three products, not three names for one thing. A home equity loan and a HELOC leave your first mortgage alone and add a second lien. A cash-out refinance replaces the first mortgage with a larger one, resetting the rate on your entire balance.

Feature	Home equity loan	HELOC	Cash-out refinance
How you get the money	One lump sum at closing	Revolving line you draw on as needed	One lump sum at closing
Rate structure	Fixed for the life of the loan	Usually variable; some lenders let you convert part of the balance to a fixed rate	Fixed or adjustable, and it replaces your existing first-mortgage rate
Repayment	Equal installments from month one, commonly 5 – 30 years	Draw period that could last 10 years, then repayment often over 10 or 20 years; payments are often significantly higher once repayment starts	New full mortgage term, typically 15 or 30 years
Typical closing costs	About 2% – 5% of the loan amount	Often lower or lender-credited, sometimes with an annual fee or early-closure fee	Full first-mortgage closing costs on the entire new loan amount
Federal disclosure you receive	Loan Estimate and Closing Disclosure	Home-equity plan disclosures at application; the Loan Estimate and Closing Disclosure rule does not apply to HELOCs	Loan Estimate and Closing Disclosure
Best use case	A known, one-time amount where payment certainty matters	Staged spending over months or years, or a standby reserve	Large cash need when you also want to change the first mortgage’s rate or term

Borrowers overlook the disclosure row. Because a home equity loan is closed-end credit secured by real property, competing offers arrive on the same Loan Estimate form, in the same order, with the same math, so two quotes read side by side without translation. HELOCs are exempt and disclose under the home-equity plan requirements instead, which makes line-by-line comparison harder. Our walkthrough of how a HELOC works covers the draw-to-repayment shift, and the pros and cons of cash-out refinancing covers when resetting the first mortgage pays.

One protection covers all three when the loan is secured by your principal residence and isn’t the loan you used to buy it: you may rescind until midnight of the third business day after closing, after the required notice, or after all material disclosures arrive, whichever happens last. Saturdays count as business days here; Sundays and federal holidays do not.

Is a home equity loan right for you?

Run the number before you run the emotion. Multiply your home’s value by the lender’s combined loan-to-value cap, subtract every balance already secured by the property, and what’s left is your ceiling.

Say you own a $300,000 home in Waterford with a $180,000 first mortgage. At an 85% combined cap the lender allows $255,000 of total secured debt, leaving about $75,000 available. Closing costs of 2% – 5% run $1,500 – $3,750, so the cash reaching your account is closer to $71,000 – $73,500, and your equity drops from $120,000 to $45,000 the day it funds.²

With that figure in hand, four questions decide it:

Is the amount known and one-time? If yes, a fixed lump sum is the right shape. If spending happens in stages across a two-year renovation, a line of credit fits better.
Does the payment survive a bad year? Stack the new payment on the first mortgage, taxes and insurance, then ask whether it clears on one income instead of two. If not, the loan is too big whatever the approval says.
Does the use outlive the loan? A roof, a furnace, an addition, or retiring double-digit revolving debt all pass. A depreciating purchase does not.
Would touching the first mortgage be better? If your existing rate sits above what the market offers now, a cash-out refinance may beat a second lien outright. If it carries a rate you’d hate to lose, adding a second is usually cheaper.

Shopping matters more here than on first mortgages, because second-lien pricing and combined-LTV caps vary widely and are rarely advertised. Our home equity loan tips cover what to compare on competing offers, and the Refinancing and Home Equity guide maps every route to your equity.

What Michigan homeowners should know

Michigan’s numbers change the size of the decision, not its shape. The median value of owner-occupied homes in Michigan was $254,200 in the 2024 American Community Survey against $360,600 nationally, roughly 70% of the U.S. figure, a gap that compresses every equity draw in the state.

Smaller ceilings on a median home: At an 85% combined cap, a $254,200 Michigan home supports about $216,000 of total secured debt, so an owner still owing $150,000 reaches roughly $66,000, and $1,300 – $3,300 of that never leaves the closing table. The same math on the national median yields close to $156,000. Size projects to your ceiling, not to national averages.
The redemption clock is six months: Under Michigan law, when residential property of four units or fewer is foreclosed by advertisement and more than two-thirds of the original debt is still owed, the redemption period after the sheriff’s sale is six months. That is not comfort. It is the reason to keep the payment small enough that you never meet it.
Second-lien access is a broker advantage: Many Michigan retail banks either don’t offer standalone second mortgages or offer exactly one product on one set of terms. Because Align is a broker, we place home equity loans and HELOCs through partner wholesale lenders with different combined-LTV caps, credit thresholds and fees, then show you where your file prices best. Our guide to using home equity wisely covers which uses hold up over a full loan term.

How Align handles home equity

Your house is not an ATM. Before how, the first question is always why.

If you have a low rate on your first mortgage, a standalone HELOC or home equity loan lets you borrow without giving it up. Align places both, plus cash-out refinances, through multiple wholesale lenders, and Samantha shows you all three side by side.

Compare your equity options Home equity loans in Michigan

FAQ: Home equity loans

Here are answers to common questions about home equity loans.

What is the difference between a home equity loan and a HELOC?

A home equity loan is a fixed-rate lump sum with a set repayment schedule. A HELOC is a revolving line of credit with a variable rate that you draw from as needed during a draw period, then repay. Choose the loan when you know the exact amount and want payment certainty; choose the line when spending happens in stages over months or years. Our breakdown of how a HELOC works walks through the draw and repayment periods.

Can I lose my home if I default on a home equity loan?

Yes. A home equity loan is secured by your house, so the lender can foreclose if you stop paying, even though it sits in second position behind your first mortgage. That is exactly why the debt carries a lower rate than a credit card. Borrow only what your budget services comfortably through an income disruption, not the maximum the lender approves, our guide to using home equity wisely covers how to size that number.

Is home equity loan interest tax deductible?

Sometimes. Under current federal rules, interest is deductible only when the borrowed money is used to buy, build, or substantially improve the home that secures the loan, and only if you itemize. Using the funds for credit card payoff, tuition, or a car makes the interest nondeductible. Confirm your specific situation with a tax professional, and see our home equity loan tips for what to document when the proceeds fund a renovation.

How much equity do I need to get a home equity loan?

Most lenders want you to retain a meaningful equity cushion, commonly capping the combined first mortgage and home equity balance at 80% to 85% of the home’s value. On a $300,000 home with a $180,000 first mortgage, an 85% cap would leave roughly $75,000 of accessible equity. An appraisal or valuation sets the number the lender actually uses, and cash-out refinancing follows a different set of limits worth comparing.

The bottom line on home equity loans

A home equity loan turns your equity into a fixed-rate lump sum with a payment that never changes, at a cost of roughly 2% – 5% of the loan amount and a lien on your house. It works when the amount is known, the use outlasts the term, and the payment survives a bad year. It fails when closing costs dominate a small loan, when the purchase depreciates faster than the balance amortizes, or when the borrower takes the full approval instead of the right number. In Michigan, where median owner-occupied value runs about $254,200, that ceiling is smaller than national articles suggest.

If you’re ready to see what your equity is worth on paper, talk to Align Lending. We’ll shop a home equity loan, a HELOC, and a cash-out refinance across our lender network and put the three side by side. Call 248-506-5727 or start online today.

Footnotes:

1. This is general information, not tax advice. Whether any mortgage or home equity interest is deductible depends on how the proceeds were used, whether you itemize, your total qualifying debt, and other individual circumstances. Consult a qualified tax professional about your situation. Return to text.

2. Example figures in this article are hypothetical and for educational purposes only; they do not constitute an advertisement of credit terms or a rate quote under federal or state lending laws. Your loan amount, combined loan-to-value limit, closing costs, rate and payment depend on your application, your property’s appraised value, your credit, and the lender’s guidelines, and will be itemized on your Loan Estimate and Closing Disclosure. Return to text.

Sources: Home equity loan closing costs of 2% – 5% of the loan amount, combined loan-to-value caps of 80% – 85%, and minimum credit scores near 620 on second-lien products reflect observed guidelines across the wholesale lenders in Align Lending’s network and vary by lender. Owner-occupied real estate of $47.9 trillion and home mortgage debt of $13.8 trillion in the fourth quarter of 2025, Federal Reserve, Financial Accounts of the United States (Z.1), released March 19, 2026. Home equity interest deductible only to the extent proceeds were used to buy, build, or substantially improve the home securing the loan, and the $750,000 / $375,000 limit on home acquisition debt incurred after December 15, 2017, IRS Publication 936. Debt-to-income ratio definition and the absence of a single across-the-board limit, Consumer Financial Protection Bureau. Right to rescind until midnight of the third business day following consummation, delivery of the required notice, or delivery of all material disclosures, whichever occurs last, and Saturdays counting as business days for rescission, 12 CFR § 1026.23. Loan Estimate within three business days of application and Closing Disclosure at least three business days before consummation on closed-end credit secured by real property, and the exclusion of HELOCs from those integrated disclosures, 12 CFR § 1026.19(e) and (f); home-equity plan disclosures for HELOCs, 12 CFR § 1026.40. HELOC draw period that could last 10 years, repayment often over 10 or 20 years, variable rates, and materially higher payments in repayment, Consumer Financial Protection Bureau. Median value of owner-occupied housing units of $254,200 in Michigan and $360,600 nationally, U.S. Census Bureau, American Community Survey 2024 one-year estimates, Table B25077. Six-month redemption period after a foreclosure sale of residential property of four units or fewer when more than 66-2/3% of the original indebtedness remains due, MCL 600.3240. Current mortgage rate reference, Freddie Mac Primary Mortgage Market Survey.

This article is for informational purposes only and is not intended to provide legal, financial, or tax advice. Loan terms, closing costs, combined loan-to-value limits, credit requirements and tax rules change and vary by lender, property and individual circumstance; confirm your figures with your Loan Estimate and Closing Disclosure and consult a qualified professional about your situation. Figures shown are illustrative, are not a rate quote or an offer of credit, and are subject to change. Align Lending is an independent Michigan mortgage broker, NMLS #2041154.