Equity Loan

July 30, 2009

An equity loan is one type of mortgage that is placed on a piece of real estate in place of cash and given to the borrower. Most commonly, lending institutions ask that the borrower only repays an interest component of said loan every month. This interest component is calculated daily and added up with the loan once a month. The borrower, if he wishes, can pay more than this required monthly amount to the outstanding principal amount at any time, so that the resulting interest component calculated from that particular day forward will be lower than the previous component.



Equity loans are seen as advantageous by many people because the interest rate that applies to equity loans can be found to generally be much lower than the interest rate applied to certain unsecured loans, like those of credit card debt. This is because equity loans generally involve collateral, which is not the case with credit card debt.

A home equity loan (HEL) is one where the borrower can use the equity of their own home as collateral. Most commonly, these loans are used to help garner some extra finances for home repairs, college education or medical bills. An HEL produces a lien against a house of the borrower, and thereby reduces any actual home equity.

Most of the time HEL are second position liens, but can also be placed as first, or sometimes even third, position. In order for home equity loans to be passed, lenders need proof of excellent and reliable credit history, along with reasonable combined loan to value ratios. There are two types of home equity loans, open end and closed end.

Both open end HEL and closed end HEL are called second mortgages. This is because they are obtained through the property value, similar to a traditional mortgage. Usually, HEL are more short term compared to first mortgages.


When considering an HEL, the borrower needs to be familiar with certain terms involved. Some of the important terms are non-dischargeable and dischargeable debt, unsecured and secured debt, and non-recourse and recourse loan. When deciding to take out a loan of any kind, the borrower needs to be aware of the different types of loans, as well as whether the debt will still hold in the light of bankruptcy.

Home equity loans fall under the category of secured loans. What this means is that the debt is obtained by securing it against the collateral.

Essentially, if the borrower cannot, for any reason, repay the home equity loan, the lender or creditor has the right to take possession of the piece of real estate, be it land or housing, and sell it to regain the original amount that was borrowed, so as to satisfy the outstanding debt. Credit card debt, on the other hand, is called an unsecured debt.



This means that no tangible assets are named as collateral in order to obtain the loan. It is not uncommon to use home equity loans to repay a credit card debt, and in doing so the borrower is converting an unsecured debt into a secured one.

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Written by Uncle Sam · Filed Under Mortgage and Loan 

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