What is a fixed-rate home equity loan?

A fixed-rate home equity loan is a second mortgage that allows you to utilize the equity you currently have in your home. You’ll receive your loan in a lump sum, and your payments will be added on top of your current mortgage, with the interest rate fixed.

In most cases, a home equity loan will allow you to borrow between 80 to 85 percent of your home’s value, minus what you still owe on your mortgage. Say your home is worth $400,000 and you currently owe $200,000 on it. Multiply the total value, $400,000, by .8, and you’ll get $320,000 -- this is how much you could potentially borrow if your home were entirely paid off. Then subtract $200,000, which is what you still owe, and you’ll get $120,000. This figure is how much the lender will allow you to borrow.

Most lenders require homeowners to have at least a 620 credit score to qualify for a home equity loan. Additionally, homeowners will need to have at least 15 to 20 percent in home equity available, and they must have a 43 percent debt-to-income ratio at a minimum. Some lenders will also require a professional appraisal to determine your home’s exact market value.

Term options

Depending on the lender you work with, home equity loans are usually offered with a variety of term options. Terms are available in increments of five or ten, with the most common being 5, 10, 15, 20, and 30-year terms. These numbers indicate the number of years you’ll have to pay off your loan, with payments typically set with a fixed interest rate.

The fewer the years, the higher the monthly payments you’ll be making, but the less interest you’ll pay overall. Likewise, the longer the term, the lower your payments will be each month, but the more interest you’ll pay in the end. What term you choose is entirely up to what you think you can afford to pay on a monthly basis and what terms your lender of choice happens to offer.

Is a home equity loan the right choice for you?

If you own a home and you’re interested in borrowing some cash, a fixed home equity loan may or may not be a good option for you. You’ll need to consider what your goals are in taking out a loan and what you can realistically afford each month, as your mortgage payments will increase. Here’s a quick chart highlighting some of the major pros and cons of this type of loan:

Given that you receive the cash in one lump sum, this is a great choice for homeowners who know exactly what they want to do with the money they’re borrowing. Perhaps you want to start a remodeling project on your house, or you have debt you need to quickly pay off. If you know how much money you need and how you’ll use it, a fixed-rate home equity loan might be the right choice.

If, however, you’re interested in a more flexible loan option, a HELOC might be one to consider. With this type of loan, you borrow money on an as-needed basis, rather than borrowing one large lump sum from the start. If you want a loan that is easier to qualify for, on the other hand, you might also consider going for a cash-out refinance -- these often come with a lower interest rate as well.

Whatever type of loan you end up going for, it’s important that you shop around and compare your lender options beforehand.