How Home Equity Loans Work

Home equity loans are fixed-rate mortgage loans that with a fixed monthly payment. A home equity loan is secured by the available equity in your home. You receive the money you borrow all at one and then you pay it back over time in fixed monthly payments.

Home equity loan rates are a few percentage points higher than home equity line of credit (HELOC) rates. The interest rates are higher but you know what your payments will be over the life of the home loan because the rate stays the same. Unlike a variable rate loan like a HELOC.

Home equity loans are usually pegged to the Prime Rate that is published in The Wall Street Journal. The WSJ prime rate is also used to set interest rates on credit card rates and on car loans.

You can use a home equity loan to pay off higher interest rate credit cards. Home equity loan rates are around 7 percent these days, the average credit card rate is a lot higher, usually in the double digits and can approach 20% or higher for people that have less than stellar credit histories.

Using a home equity loan to renovate or add onto your house is another popular use. When home equity loans are used in this way you can also get a tax deduction on the interest you pay on the loan.