--- title: What is a Home Equity Loan, and How does it Actually Work? description: Many homeowners these days use a home equity loan to pay off outstanding debts or finance a significant purchase. If you're interested, here's everything you need to know about them. image: https://blog.sdnyrealty.com/hubfs/Blog_Images/Home%20Equity%20Loan.jpg --- - [Pay Rent](https://sdnyrealty.com/pay-rent/) - [Forms](https://sdnyrealty.com/forms/) -   [![S&D Commercial Real Estate Agency](https://blog.sdnyrealty.com/hs-fs/hubfs/S__D_Real_Estate_January2019/images/sd-original-logo_300px.png?width=300&height=194&name=sd-original-logo_300px.png "S&D Commercial Real Estate Agency")](https://sdnyrealty.com/) - [About](https://sdnyrealty.com/long-island-commercial-real-estate-firm/) - [Agents](https://sdnyrealty.com/long-island-real-estate-agents/) - [Listings](https://sdnyrealty.com/property-listings/) - [Property Management](https://sdnyrealty.com/property-management-company/) - [Resources](https://sdnyrealty.com/real-estate-resources/) - [Neighborhood Guide](https://sdnyrealty.com/neighborhood-guide/) - [Long Island](https://sdnyrealty.com/long-island-commercial-real-estate/) - [Nassau County](https://sdnyrealty.com/nassau-county-commercial-real-estate/) - [Bethpage](https://sdnyrealty.com/bethpage-commercial-real-estate/) - [Farmingdale](https://sdnyrealty.com/farmingdale-commercial-real-estate/) - [Franklin Square](https://sdnyrealty.com/franklin-square-commercial-real-estate/) - [Garden City](https://sdnyrealty.com/garden-city-commercial-real-estate/) - [Glen Cove](https://sdnyrealty.com/glen-cove-commercial-real-estate/) - [Hempstead](https://sdnyrealty.com/hempstead-commercial-real-estate/) - [Hicksville](https://sdnyrealty.com/hicksville-commercial-real-estate/) - [Long Beach](https://sdnyrealty.com/long-beach-commercial-real-estate/) - [Mineola](https://sdnyrealty.com/mineola-commercial-real-estate/) - [Rockville Centre](https://sdnyrealty.com/rockville-centre-commercial-real-estate/) - [Suffolk County](https://sdnyrealty.com/suffolk-county-commercial-real-estate/) - [Babylon](https://sdnyrealty.com/suffolk-county-commercial-real-estate/babylon-commercial-real-estate/) - [Brookhaven](https://sdnyrealty.com/brookhaven-commercial-real-estate/) - [Hauppauge](https://sdnyrealty.com/hauppauge-commercial-real-estate/) - [Huntington](https://sdnyrealty.com/huntington-commercial-real-estate/) - [Islip](https://sdnyrealty.com/islip-commercial-real-estate/) - [Melville](https://sdnyrealty.com/melville-commercial-real-estate/) - [Riverhead](https://sdnyrealty.com/riverhead-commercial-real-estate/) - [Smithtown](https://sdnyrealty.com/smithtown-commercial-real-estate/) - [Southampton](https://sdnyrealty.com/southampton-commercial-real-estate/) - [Consulting Services](https://sdnyrealty.com/consulting-services/) - [Property Appraisal Services](https://sdnyrealty.com/property-appraisal/) - [Zoning Regulations](https://sdnyrealty.com/zoning-regulations/) - [Forms](https://sdnyrealty.com/forms/) - [Veterans & Military Housing](https://sdnyrealty.com/veterans-military-housing/) - [Join our Program](https://sdnyrealty.com/veterans-military-housing/#apply-now) - [Forms & Applications](https://sdnyrealty.com/forms/) - [Pay Rent](https://sdnyrealty.com/pay-rent/) - [Blog](https://blog.sdnyrealty.com/blog) - [Contact](https://sdnyrealty.com/contact/) # What is a Home Equity Loan, and How does it Actually Work? - August 08, 2018 - [residential real estate](https://blog.sdnyrealty.com/blog/topic/residential-real-estate), [Mortgage](https://blog.sdnyrealty.com/blog/topic/mortgage), [Loans](https://blog.sdnyrealty.com/blog/topic/loans) - 0 ![What is a Home Equity Loan, and How does it Actually Work?](https://blog.sdnyrealty.com/hubfs/Blog_Images/Home%20Equity%20Loan.jpg) If you’re a homeowner looking to finance a large purchase or pay off preexisting debt, consider a home equity loan, also known as a second [mortgage](https://blog.sdnyrealty.com/blog/mortgage-broker). Read along to learn more about these [kinds of loans](https://blog.sdnyrealty.com/blog/how-to-refinance), as well as if they’re right for you and your situation. ## What is a Home Equity Loan? A home equity loan makes it possible for property owners to take out large sums of money by borrowing it against their home’s equity (the difference between the property value of a home and any of its outstanding debts). Essentially, people can take out money and use their home as collateral. With these fixed-rate installment loans, you will receive all the money borrowed in one lump sum, which is why they are preferable to those looking to finance big purchases like a renovation. Right away, the loan will begin to be paid in monthly installments. ![Home Equity Loan](https://blog.sdnyrealty.com/hs-fs/hubfs/Blog_Images/Home%20Equity%20Loan1.jpg?width=320&name=Home%20Equity%20Loan1.jpg) ### Common Reasons to Spend Home Equity For reference, we have compiled a list of common reasons that a homeowner might borrow against their equity: - Home improvements - Credit card debt - Medical bills - Education - Investment opportunities Granted, not everyone in these situations will take out home equity loans. However, those who do usually list one of these reasons. ![Home Equity Loan](https://blog.sdnyrealty.com/hs-fs/hubfs/Blog_Images/Home%20Equity%20Loan2.jpg?width=320&name=Home%20Equity%20Loan2.jpg) ## 3 Essential Tips for Taking out a Home Equity Loan ### 1.      The Importance of your Loan-to-Value Ratio Although you’re dealing with equity, [Property Value](https://blog.sdnyrealty.com/blog/curb-appeal) is also an important factor in deciding whether you receive a loan or not. Most of the time, different lenders or banks will have different requirements for what your [loan-to-value (LTV) ratio](https://www.thebalance.com/loan-to-value-ratio-315629) should be. It helps lenders evaluate risk. For instance, the more they actually lend you, the greater the risk. Ideally, the golden ratio for your LTV is around 80 percent (or less). If you can get yours to around this number, you should be able to secure a loan. ### 2.      How you use the Home Believe it or not, it matters whether or not the home you’re borrowing against is your primary residence. [According to Bankrate](https://www.bankrate.com/mortgages/home-equity/pointers-for-taking-out-home-equity-loans/), you can still get a loan by borrowing against an investment property. However, you may need more equity and the interest rate will probably be higher. Basically, if you’re borrowing against a property that isn’t your primary residence, you better have a lot of equity and excellent credit. ![Home Equity Loan](https://blog.sdnyrealty.com/hs-fs/hubfs/Blog_Images/Home%20Equity%20Loan3.jpg?width=320&name=Home%20Equity%20Loan3.jpg) ### 3.      Conduct Research Before you sign off on any kind of loan, it’s always a good idea to do some homework and check out different lenders’ reputations. After all, they’re going to be checking your track record, so why not do the same for theirs? From public comments to the [Consumer Financial Protection Bureau](https://www.consumerfinance.gov/), there are plenty of resources for you to use. After all, the last thing you want to do is lock yourself into a loan with a shady, untrustworthy lender. Using these tips and tricks, you should be able to determine whether or not a home equity loan is within your best interest --- [![Join The Commercial Courier](https://no-cache.hubspot.com/cta/default/432922/d68af3fc-de89-4dd0-bc71-e7dba2bb02f5.png)](https://cta-redirect.hubspot.com/cta/redirect/432922/d68af3fc-de89-4dd0-bc71-e7dba2bb02f5) ### Tags: - [residential real estate](https://blog.sdnyrealty.com/blog/topic/residential-real-estate) - [Mortgage](https://blog.sdnyrealty.com/blog/topic/mortgage) - [Loans](https://blog.sdnyrealty.com/blog/topic/loans) ### [Previous post](https://blog.sdnyrealty.com/blog/babyproofing) #### [Babyproofing 101: How to Protect your Child in the Home](https://blog.sdnyrealty.com/blog/babyproofing) ### [Next post](https://blog.sdnyrealty.com/blog/apartment-search) #### [How to Start your Apartment Search Off on the Right Foot](https://blog.sdnyrealty.com/blog/apartment-search) ### Related posts [![How a Home Appraisal Determines Residential Property Value](https://blog.sdnyrealty.com/hs-fs/hubfs/Blog_Images/Home%20Appraisal.jpg?width=768&name=Home%20Appraisal.jpg)](https://blog.sdnyrealty.com/blog/home-appraisal) - September 26, 2018 - [Buying](https://blog.sdnyrealty.com/blog/topic/buying), [residential real estate](https://blog.sdnyrealty.com/blog/topic/residential-real-estate), [Selling](https://blog.sdnyrealty.com/blog/topic/selling), [property value](https://blog.sdnyrealty.com/blog/topic/property-value), [Refinancing](https://blog.sdnyrealty.com/blog/topic/refinancing) ### How a Home Appraisal Determines Residential Property Value Appraising a property plays a significant role in the real estate industry. While appraisals are used for a wide variety of reasons, one thing is... [Continue reading](https://blog.sdnyrealty.com/blog/home-appraisal) [![How to Paint your Home or Apartment: A Beginner’s Guide](https://blog.sdnyrealty.com/hs-fs/hubfs/Blog_Images/How%20to%20Paint.jpg?width=768&name=How%20to%20Paint.jpg)](https://blog.sdnyrealty.com/blog/how-to-paint) - September 05, 2018 - [residential real estate](https://blog.sdnyrealty.com/blog/topic/residential-real-estate), [property value](https://blog.sdnyrealty.com/blog/topic/property-value), [home improvement](https://blog.sdnyrealty.com/blog/topic/home-improvement), [interior design](https://blog.sdnyrealty.com/blog/topic/interior-design) ### How to Paint your Home or Apartment: A Beginner’s Guide Whether it’s the wall, trim or ceilings, painting the interior of your home or apartment isn’t such an easy project. From preparation to execution... 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