Legal Definitions - home-equity loan

A home-equity loan is a type of loan that allows a homeowner to borrow money using their home as collateral. The amount that can be borrowed is based on the equity the homeowner has in their home, which is the difference between the home's value and the amount still owed on the mortgage.

For example, if a homeowner's home is worth $300,000 and they still owe $200,000 on their mortgage, they have $100,000 in equity. They may be able to borrow up to a certain percentage of that equity, such as 80%, which would be $80,000.

Home-equity loans are often used for home improvements, debt consolidation, or other major expenses. The loan is repaid over a set period of time, usually with a fixed interest rate.

Example: John has owned his home for 10 years and has paid off $100,000 of his mortgage. His home is now worth $300,000, so he has $200,000 in equity. He decides to take out a home-equity loan to pay for a new roof and some other home improvements. He is approved for a loan of $50,000, which he will repay over 10 years with a fixed interest rate of 5%. This means he will make monthly payments of about $530 until the loan is paid off.

This example illustrates how a homeowner can use their home equity to borrow money for major expenses. The loan is secured by the home, which means the lender can take possession of the home if the borrower fails to repay the loan.