An equity loan may refer to a mortgage loan in which the borrower receives money. Typically the loan is secured by real estate already owned outright.
For example, if a person owns a home worth $100,000, but does not currently have a mortgage on it, they may take an equity loan at 80% loan to value (LTV) or $80,000 in cash in exchange for a mortgage on the title.
Many lending institutions require the borrower to repay only an interest component of the loan each month (calculated daily, and compounded to the loan once each month). The borrower can apply any surplus funds to the outstanding loan principal at any time, reducing the amount of interest calculated from that day onward. Some loan products also allow the possibility to redraw cash up to the original LTV, potentially perpetuating the life of the loan beyond the original loan term.
The interest rate applied to equity loans is much lower than that applied to unsecured loans, such as credit card debt. The reasoning behind this is that equity loans involve collateral, and credit card debt does not.
A home equity loan is a type of loan in which the borrower uses the equity of his or her home as collateral. The loan amount is determined by the value of the property, and the value of the property is determined by an appraiser from the lending institution. Home equity loans are often used to finance major expenses such as home repairs, medical bills, or college education. A home equity loan creates a lien against the borrower's house and reduces actual home equity.
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