Legal Definitions - home-equity loan

A home-equity loan is a type of loan that allows homeowners to borrow a lump sum of money using the equity they have built up in their home as collateral. Equity represents the portion of the home's value that the owner truly owns, calculated as the home's current market value minus the outstanding balance on any existing mortgages. Because the loan is secured by the home, it often comes with a lower interest rate compared to unsecured loans. The borrower receives the full loan amount upfront and repays it over a fixed period, typically with a fixed interest rate. If the borrower defaults on the payments, the lender has the right to foreclose on the property.

• Example 1: Home Renovation

  Sarah and Tom want to add a new master bedroom suite to their house, a project estimated to cost $75,000. They have lived in their home for 15 years, and its value has increased significantly, giving them substantial equity. Instead of taking out a personal loan with a higher interest rate, they apply for a home-equity loan. They receive the $75,000 as a single payment, which they use to pay the contractors. They will then repay the loan over 15 years at a fixed interest rate.

  This illustrates a home-equity loan because Sarah and Tom are borrowing a fixed amount of money, secured by the equity in their home, to fund a specific, large expense. They receive the funds as a lump sum and repay it on a set schedule.

• Example 2: Debt Consolidation

  Maria has accumulated several high-interest credit card debts totaling $40,000. She owns a home with significant equity and is looking for a way to manage her debt more effectively. She decides to take out a home-equity loan for $40,000. She uses the lump sum from the loan to pay off all her credit cards immediately. Now, instead of multiple payments at varying high interest rates, she has one predictable monthly payment for her home-equity loan, often at a much lower, fixed interest rate.

  This demonstrates a home-equity loan as Maria is leveraging the value of her home to secure a new loan. She receives a single disbursement of funds to consolidate her existing debts, benefiting from the typically lower interest rates associated with secured loans.

• Example 3: Funding Education Expenses

  The Chen family needs to pay for their daughter's first year of college tuition, which amounts to $30,000. They have paid down a considerable portion of their mortgage over the years, resulting in significant equity in their home. To avoid taking out student loans that might accrue high interest, they opt for a home-equity loan. They receive the $30,000 lump sum, which they use to cover the tuition and related educational costs. They will then repay the loan over a 10-year period.

  This example shows a home-equity loan being used to access a fixed amount of capital from the home's value to cover a substantial, one-time expense like college tuition. The loan provides immediate funds and is repaid over a defined term.