Everything You Wanted to Know About Home Equity Loans (and How to Pick the Right One)

Home Equity Loans, HELOCs — you see them advertised everywhere: online, on billboards, and even within your own online banking dashboard. But what are they, really? And how do you know which one might make sense for you?

Let’s break it all down — simply and clearly.

What Is a Home Equity Loan?

Let’s start with the word equity.

Equity is how much of your home you truly “own.” If your home is worth $350,000 and you still owe $200,000 on your mortgage, your home equity is $150,000 — that’s the part of your home’s value that belongs entirely to you.

A Home Equity Loan lets you borrow money using that equity as collateral (basically, your home backs up the loan). You can use the money for almost anything — home repairs, debt consolidation, tuition, or major life expenses — but most people use it to improve their homes.

It’s a way to put your home’s value to work for you without selling it.

What are the ways you can use your home’s equity?

First off, congrats on being a homeowner! Owning a home is a big step toward building wealth — even if it sometimes feels like an endless list of projects and repairs.

Depending on your current mortgage situation, there are a few ways to tap into your equity:

1. Refinance Your First Mortgage

This means replacing your current mortgage with a new one. This is often done to get a lower interest rate, change the loan term, or take cash out of your equity (a cash-out refinance). If your current mortgage rate is already very low (in the 2–3% range), refinancing might not be worth it. Today’s rates are higher, and refinancing could end up costing more in the long run.

2. Take Out a Second Mortgage

A second mortgage is exactly what it sounds like — a new loan secured by your home’s equity, in addition to your existing first mortgage. You receive a lump sum upfront and repay it in regular monthly payments over a set term.

Because it’s “second in line” behind your main mortgage, interest rates are usually a bit higher than first mortgage rates. Still, it’s a good option with rates typically lower than credit cards or personal loans.

3. Open a Home Equity Line of Credit (HELOC)

A HELOC (pronounced he-lock) works more like a credit card. You get approved for a certain limit, and you can borrow from it as needed — repaying and borrowing during what’s called the draw period. Typically, the draw period lasts 10 years, followed by an additional 5 years where the loan goes into the repayment period. It is open but you can no longer draw from it, only make payments.

Like a credit card, you only pay interest on what you use. Also like a credit card, HELOCs usually have a variable interest rate (which means your rate can change over time). They are tied to the prime rate.

Prime rate is an interest rate benchmark based on the federal funds rate and published by the Wall Street Journal, that most commercial financial institutions use on variable-rate lines of credit (credit cards, HELOCs, etc.)

HELOCs are great for ongoing expenses, like home projects that happen in stages, or for having emergency funds ready just in case. Many people will take out a HELOC for an on-going project and then roll it over into a Second Mortgage for the fixed-payment structure. 

How much does a Home Equity Loan cost?

Even though home equity loans and HELOCs are cheaper than credit cards or personal loans, they do come with closing costs, similar to when you purchased your home. Costs can range from 2% – 5% of the total amount borrowed.

Here’s what to expect for closing costs:

• Application fee, processing fee, or origination fee: This covers the lender’s paperwork and processing costs. This varies widely by lender. Some lenders will charge a percentage of the loan amount as the origination fee (.5 – 2%), others, charge a flat fee. This is where most lender cut for their “little-to-no closing cost” promotions.
  • Madison Credit Union charges a flat fee of $544 for first mortgages and $349 for second mortgages and HELOCs.
• Appraisal fee: $300–$600 for someone to confirm your home’s current value.
• Title insurance or Letter Report fee: Makes sure there are no other claims on your property.
  • Madison Credit Union charges what the title company charges us. We are charged a flat fee of $70 for loans under $100,000 and a variable rate for loans over $100,000.
• Loan recording fee or filing fee: A fee paid to the county recorder to report the new lien on the property.
  • Madison Credit Union again charges what the county office charges us, a flat rate of $75.
• Credit report fees: some credit unions will charge for the cost of pulling a credit report on the loan.
  • Madison Credit Union does not charge for this.
• Annual or inactivity fees (for HELOCs): Some lenders charge a small yearly fee to keep the line open if there is no activity.
  • Madison Credit Union does not charge any maintenance fees or inactivity fees.

Other costs may include a prepayment penalty or early cancellation fee.

• • Madison Credit Union does not charge either of these. In fact, we encourage our members to make bi-weekly payments to help pay down their loans faster, paying more principal each month and less interest overall.

 Comparing the Options

When a HELOC may not be right for you

HELOCs can be super handy, but they’re not right for everyone. Here’s when to think twice:

1. If you’re easily tempted to spend.
   A HELOC can feel like a big credit card. It’s easy to dip into it for things that don’t add value — like vacations or toys. Remember: your home is the collateral.
2. If interest rates are climbing.
   Because HELOCs have variable rates, your payment can go up when the prime rate rises. If you’re on a tight budget, a fixed-rate loan might be safer.
3. If your income is unstable.
   Payments can fluctuate, so if your paycheck varies a lot, it might be better to go with a loan that has steady payments.

 How to Choose the Right Option for You

Here are a few guiding questions:

• Do you need a set amount upfront?
  → A Second Mortgage may be your best fit.
• Do you expect ongoing expenses over time?
  → A HELOC gives flexibility to borrow as needed.
• Are you looking to lower your overall mortgage rate or simplify payments?
  → Consider a refinance if current rates make sense for you.

Also think about your comfort with variable rates — if you prefer predictability, a fixed-rate loan may feel more secure.

 A Few Final Tips

• Don’t overborrow. Just because you can borrow a large amount doesn’t mean you should. Borrow only what you need and can comfortably repay.
• Factor in fees. Closing costs, appraisal fees, and annual HELOC maintenance fees can vary by lender.
• Remember your goals. If your goal is long-term savings, using home equity for high-interest debt consolidation or value-adding home improvements can make strong financial sense.

The Bottom Line

Your home is more than just a roof over your head — it’s also one of your biggest financial tools. Whether you want to fix it up, pay down debt, or cover a big expense, understanding your home equity options helps you make smart moves that fit your life.

If you’re thinking about using your home’s equity, Madison Credit Union is here to help you figure out what works best for you. We’ll walk you through the details, compare your options, and help you find a plan that fits your budget and goals — no jargon, no pressure.