Home Equity Loan
IntermediateA home equity loan is a loan, common in the United States, that allows a homeowner to borrow a lump sum against the equity in their home, which is the difference between the property's value and the amount still owed on the mortgage.
A home equity loan is sometimes called a second mortgage, because it is secured on the home in addition to the main mortgage. The borrower receives the money upfront and repays it over a fixed term, usually at a fixed interest rate.
Lenders typically allow borrowing up to a percentage of the home's value, minus the existing mortgage. For example, if a home is worth 400,000, the existing mortgage is 250,000 and the lender allows total borrowing of up to 80% of the home's value, the homeowner could borrow up to 70,000.
Because the loan is secured on the home, interest rates are usually lower than for unsecured loans such as personal loans or credit cards. People often use home equity loans for home improvements, education costs or consolidating more expensive debts.
The key risk is that the home is collateral. If the borrower cannot repay, they could lose their home. In the United Kingdom and some other countries, similar borrowing is often arranged as a further advance from the existing mortgage lender, by remortgaging, or as a secured loan, sometimes called a second-charge mortgage.
For worked examples and full lessons, visit notesbysara.org.