What is a home equity loan based on?

A home equity loan is primarily based on the difference between the current market value of the home and the amount still owed on any existing mortgage or loans secured by that home. This difference represents the homeowner's equity, which is essentially the part of the home that they truly own free and clear of debt.

For instance, if a home has a market value of $300,000 and the homeowner still owes $200,000 on their mortgage, the equity in the home would be $100,000. Lenders typically allow homeowners to borrow a percentage of this equity, making home equity loans a useful way to access funds for various needs, such as home renovations, debt consolidation, or major expenses.

Understanding this calculation is key to grasping how much homeowners can borrow and what financial obligations they have against their property. Thus, the option that emphasizes the difference between the current market value and the outstanding mortgage amount accurately reflects the basis for securing a home equity loan.