Guide to Home Equity Loans: Pros and Cons and How to Get One

Updated on: January 22, 2026

If you own a home, you might have heard about home equity loans. These loans let you borrow money using the value of your home as security. They’re also called equity loans, home equity installment loans, or second mortgages. In this guide, we’ll explain what home equity loans are, their pros and cons, and how to get one.

What Is a Home Equity Loan?

A home equity loan is a type of loan where you use the equity in your home as collateral. Equity is the difference between your home’s current market value and the amount you still owe on your mortgage.

For example, if your home is worth ₹50 lakh and you owe ₹20 lakh on your mortgage, you have ₹30 lakh in equity. You can borrow against this equity.

Home equity loans are usually given as a lump sum, with a fixed interest rate and a fixed repayment period. This means you’ll know exactly how much you’ll pay each month and for how long.

How Does a Home Equity Loan Work?

You apply for a loan using your home’s equity as collateral.
The lender checks your credit score, income, and the value of your home.
If approved, you get a lump sum of money.
You repay the loan in fixed monthly installments (EMIs) over a set period.

Pros of Home Equity Loans

1. Lower Interest Rates

Home equity loans usually have lower interest rates than unsecured loans like personal loans or credit cards. This can save you a lot of money over time.

2. Tax Deductible Interest

In some cases, the interest on a home equity loan may be tax-deductible. However, recent tax law changes mean this benefit may not apply to everyone.

3. Access to Large Amounts of Money

You can borrow a large sum, which is useful for big expenses like home renovations, education, or paying off high-interest debt.

4. Fixed Monthly Payments

Home equity loans have fixed monthly payments, making it easier to budget and plan for the future.

5. Potential to Increase Home Value

Using the loan for home improvements can increase your property’s value and your equity.

6. Faster Approval Process

Because your home secures the loan, the approval process is often faster than for other types of loans.

7. No Prepayment Penalties

Most home equity loans don’t charge extra fees if you pay off the loan early.

Cons of Home Equity Loans

1. Risk of Foreclosure

If you can’t make your payments, the lender can take your home. This is a serious risk to consider.

2. Fees and Closing Costs

Home equity loans come with various fees, like application fees, appraisal fees, and origination fees. These can add up quickly.

3. Limited Use of Funds

These loans are usually meant for specific purposes, like home repairs or renovations. If you need money for something else, you might need a different type of loan.

4. Impact on Credit Score

Taking out a home equity loan can affect your credit score, especially if it increases your debt-to-income ratio.

5. Tying Up Equity

A home equity loan uses part of your home’s equity, which means you can’t use that equity for other purposes, like selling or refinancing your home.

How to Get a Home Equity Loan

1. Determine Your Eligibility

To qualify, you need equity in your home, a good credit score, and a stable income. The lender will check these factors before approving your loan.

2. Gather Necessary Documents

You’ll need proof of income, proof of homeownership, and proof of insurance. Make sure you have these ready before applying.

3. Shop Around

Different lenders offer different interest rates and terms. Compare offers from several lenders to find the best deal.

4. Choose a Lender

Once you find a lender with good terms, apply for the loan. The lender will check your credit and may appraise your home.

5. Close the Loan

If approved, sign the loan documents and make any required payments. The funds will be disbursed to you, and you can use them for your needs.

6. Make Payments

Remember, a home equity loan is a loan and must be repaid with interest. Make your payments on time to avoid extra charges.

Conclusion

Home equity loans can be a great option for homeowners who need money for big expenses. They offer lower interest rates, fixed payments, and access to large sums. However, they also come with risks, like the possibility of losing your home if you can’t repay the loan.

Always shop around and compare different lenders to find the best deal. Make sure you understand the risks and benefits before applying. With careful planning, a home equity loan can be a powerful financial tool.

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Disclaimer: This blog is solely for educational purposes. The information provided is based on general guidelines and may vary across different insurance providers and lenders. Please verify all details with your insurance company or lender before applying for a loan. The securities/investments quoted here are not recommendatory. Always read the terms and conditions carefully and consult with a financial advisor if needed.

Home Equity Loans