Equity loan
Encyclopedia
An equity loan is a mortgage loan
in which the borrower receives cash
. 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.
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
in which the borrower receives cash
Cash
In common language cash refers to money in the physical form of currency, such as banknotes and coins.In bookkeeping and finance, cash refers to current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately...
. Typically the loan is secured by real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
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
Interest-only loan
An interest-only loan is a loan in which, for a set term, the borrower pays only the interest on the principal balance, with the principal balance unchanged...
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
Cash
In common language cash refers to money in the physical form of currency, such as banknotes and coins.In bookkeeping and finance, cash refers to current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately...
up to the original LTV, potentially perpetuating the life of the loan beyond the original loan term.
The interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
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
Collateral (finance)
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
, and credit card debt does not.
See also
- HELOCHELOCA home equity line of credit is a loan in which the lender agrees to lend a maximum amount within an agreed period , where the collateral is the borrower's equity in his/her house...
- Real estate equity
- More information on Equity loan