home equity


The current market value of a home minus the outstanding mortgage balance. Home equity is essentially the amount of ownership that has been built up by the holder of the mortgage through payments and appreciation. Typically, residential property is bought through a mortgage, which is then paid off over a number of years, often 15 or 30. After the mortgage has been fully repaid, the property then belongs to the mortgagor, namely the buyer. In the interim, however, the buyer simply builds up equity in the home. This is what a home equity loan borrows against. Although that equity cannot be sold, banks will lend money against it. Home equity loans offer significant tax savings due to the fact that the interest paid on a home equity loan is tax-deductible. Home equity loans are often used to consolidate other debt with high interest rates (like credit card debt), to finance large expenses (such as college or a wedding), or to purchase other costly items. There are two main types of home equity loans. The first type is the traditional home equity loan, also known as the second mortgage, which lends out a lump sum of money that must be repaid over a fixed period. The second type is the home equity line of credit, which provides the borrower with a checkbook or a credit card that is used to borrow funds against the home equity. Funds borrowed from a traditional home equity loan start accruing interest immediately after the lump sum is disbursed; funds borrowed from a home equity line of credit do not begin accruing interest until a purchase is made against the equity.

Use home equity in a sentence

Given the robust nature of the local housing market we were able to acquire a home equity loan for the purpose of building pool.

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Crocodile Johnny used his home equity as collateral for all the loan he could get; he was able to add an aquarium and a filter to his alligator farm with it!

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Sally was surprised how high her home equity has gone up over the years, she noticed her house value skyrocket while paying her mortgage on time every month.

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residential mortgage home equity loan