Equity Loans

An equity loan is a mortgage loan in which the borrower receives cash. Typically the loan is secured by real estate already owned outright. 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.

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 LT V, potentially perpetuating the life of the loan beyond the original loan term.

Equity loans come in two varieties - fixed-rate loans and lines of credit - and both types are available with terms that generally range from five to 15 years. Another similarity is that both types of loans must be repaid in full if the home on which they are borrowed is sold. Equity loans provide an easy source of cash. The interest rate on a equity loan - although higher than that of a first mortgage - is much lower than on credit cards and other consumer loans. As such, the number-one reason consumers borrow against the value of their homes via a fixed-rate home equity loan is to pay off credit card balances. Interest paid on a equity loan is also tax deductible, as we noted earlier. So, by consolidating debt with the home-equity loan, consumers get a single payment, a lower interest rate and tax benefits.