What Is A Home Equity Loan?

A home equity loan is a form of consumer debt, as the financial website Investopedia detailed. A home equity loan, which may also be known as an equity loan, a home equity installment, or a second mortgage is a form of debt that allows homeowners to borrow resources against their home's equity. Equity equals the homeowner's interest (in terms of economic value) in their house or the house's current market value. After subtracting the loan amount from the home's current market value from the mortgage balance that is due, the home equity loan amount can be accurately determined. 

As a concept, though, equity is considered variable. Variability means that the equity's valuation can change. One way that the valuation can change is when additional payments accrue on the homeowner's mortgage. Additionally, market forces are known to affect a property's current valuation. These market forces can include how the real estate market in a given community rises and falls.

As The Seattle Times reported, home equity is one of the benefits of home ownership. The term home equity applies because a homeowner uses the equity in their home as a form of collateral. This means that if the homeowner defaults on their loan then the bank may take possession of the property in order to satisfy the debt. The Seattle Times further detailed that home equity loans reflect their status as secured debt. Secured debt means a form of debt that is backed up by a type of property. Conversely, credit cards are a type of unsecured debt (and typically credit cards come with increased interest rates). 

As Investopedia reported, paying at least a 20% down payment in connection with a homeowner's purchase of a house instantly contributes equity to the residence. Further, as a general matter, home equity loans tend to have fixed rates. On the other hand, home equity lines of credit tend to reflect variable rates, allowing the rates to change.