Equity Loan
An equity loan, also called a home equity loan or second mortgage, is a loan secured by the borrower's equity in their home. It provides a lump sum of money at a fixed interest rate, with the home serving as collateral for the debt.
Example
“The family took out an equity loan against their home to pay for their daughter's college tuition.”
Memory Tip
Equity loan = borrowing against your 'Equal ownership' - you're using your house ownership as collateral.
Why It Matters
Equity loans offer homeowners access to large amounts of cash at relatively low interest rates for major expenses like home improvements, education, or debt consolidation. The interest may also be tax-deductible if used for qualifying home improvements.
Common Misconception
Some people confuse equity loans with HELOCs, but equity loans provide a fixed lump sum with fixed payments, while HELOCs offer a revolving line of credit with variable rates.
In Practice
A homeowner with $100,000 in equity takes out a $50,000 home equity loan at 6% interest to renovate their kitchen, receiving the full amount at closing and making fixed monthly payments over 15 years. If they default on this loan, the lender can foreclose on their home since it serves as collateral for the debt.
Etymology
Popularized in the 1980s tax reform era, combining 'equity' (your ownership stake) with 'loan' from Old Norse 'lán' (something lent).
Common Misspellings
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