Equity Loans: an explanation please!

Equity loans are loans provided by financial institutions where the borrower provides the title to some real estate and a mortgage is placed on that real estate in exchange for cash. A lien is then placed on the property which is in the form of security used on the loan, as it is a right to retain (but not sell) property, until the debt or other obligation is discharged.

Home equity loans allow a home owner to borrow money by pledging the house as collateral. Equity loans are also possible as an additional facility where the real estate value substantially exceeds the current mortgage value on the property, so a loan taken in the form of a top up.

If a person owns a house in their name, home equity loans can provide an option for borrowing large sums of money at a lower rate of interest. The only risk factor involved is that the house has to be kept as collateral against the loan. Therefore, a borrower must be completely sure that such a loan is really required and cannot be postponed.

Obviously these types of equity loans were very common when property valuations were increasing but financial institutions are being a little more conservative particularly on valuations and the percentage of valuation they will loan against, given what has happened to global property prices. Depending on your location this may be a bigger or smaller concern, impacting on your local market and lending ability of the institute in question.