What type of financing allows homeowners to borrow against the equity of their home?

A home equity loan is specifically designed for homeowners to borrow against the equity they have built up in their property. Equity refers to the difference between the market value of the home and the outstanding balance on the mortgage. Homeowners can tap into this equity as a lump-sum loan, which is often used for various purposes like home renovations, debt consolidation, or major expenses.

The way a home equity loan works is that the homeowner borrows a specific amount of money, secured by the equity in their property. This type of financing typically has a fixed interest rate and repayment schedule, making it a popular choice for those who prefer predictable monthly payments.

In contrast, a standard mortgage is primarily used to purchase a home, and while it can lead to equity buildup over time, it is not a tool for directly borrowing against that equity after the purchase. A line of credit, while also providing access to funds based on home equity, operates differently by allowing homeowners to borrow as needed, up to a certain limit, rather than providing a fixed loan amount up front. An FHA loan is a type of mortgage insured by the Federal Housing Administration, aimed at helping low-to-moderate-income buyers, but it does not specifically relate to borrowing against existing equity.