What type of loan involves borrowing against a homeowner’s equity?

A home equity loan is a type of loan that specifically allows homeowners to borrow against the equity they have built up in their property. Home equity is calculated as the difference between the market value of the home and the outstanding mortgage balance. This type of loan is secured by the property itself, meaning that if the borrower fails to repay the loan, the lender can take possession of the home.

Home equity loans usually come with fixed interest rates, and the borrower receives a lump sum that can be used for various purposes, such as funding major expenses or home improvements. The primary feature that distinguishes a home equity loan from other types of loans is its reliance on the homeowner’s equity, making it a unique financial instrument in the realm of borrowing.

Other options like home improvement loans are typically unsecured or may not directly leverage equity, student loans are intended for educational expenses, and credit card loans revolve around revolving credit lines rather than a fixed equity-based loan. Each of these options serves different purposes and comes with different terms and conditions, but only a home equity loan directly involves borrowing against the equity in a home.