An equity loan is a mortgage loan in which the borrower receives cash. Typically the loan is secured by real estate already owned outright.
For example, if a person owns a home worth $100,000, but does not currently have a mortgage on it, they may take an equity loan at 80% loan to value (LTV) or $80,000 in cash in exchange for amortgage on the title.
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 redrawcash up to the original LTV, potentially perpetuating the life of the loan beyond the original loan term.
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.
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