What type of loan allows homeowners to borrow against their equity?

A home equity loan is designed specifically to allow homeowners to borrow against the equity they have built up in their property. Equity is the difference between the market value of a home and the amount still owed on the mortgage. Home equity loans typically provide a lump sum amount that homeowners can use for various purposes, such as home improvements, paying off debt, or funding educational expenses.

This type of loan is secured by the property itself, meaning if the borrower fails to repay the loan, the lender has the right to foreclose on the home. The terms of a home equity loan often include fixed interest rates and predictable payments, making it a straightforward option for accessing funds.

In contrast, a personal loan is usually unsecured and does not require collateral, which means it often comes with higher interest rates. An auto loan is specifically designed for purchasing vehicles, while a mortgage loan is used to finance the purchase of real estate and is not focused on tapping into existing equity. Thus, the primary characteristic and purpose of a home equity loan make it the correct answer for borrowing against home equity.