School me on "Equity Loans"

[97guns]

A 10% yield returns your investment in 10 years, takes just over 7 years st 13%

[clatoden99]

I'll take a shot... let's say you finance your home purchase. You pay 15% and the financier pays 85% and keeps a lien on the property title and sale deed.
For the sake of simplicity, let's say that you own 15% of the home and the financier owns 85% of the home.
You pay your mortgage every month. Over time, two things happen. The loan principal outstanding reduces... so it may be that you now own 40% of the home. The financier owns 60%.
The second thing that happens is that the home value increases (let's assume it increases for now, we can discuss the other case later). The financier's exposure is this:

(Loan principal outstanding / home price ) * 100

As the home price increases, the financier's exposure goes down. That makes it more comfortable since the risk goes down.

But at the same time, financier's job is to give credit. It's income is from credit. And since you have been a nice guy who pays mortgage on time every month, it will offer more credit. Backed by the home, of course.

So financier's exposure goes up again based on the above formula. So does it's income. You get cash that can be used for your needs (typically, home repair, extensions, remodelling). The tax rebate is typically given for this part of the credit too.

So a win-win for everyone.

Now, in case the property price decreases, the financier's exposure increases. It can even go above 100%. In which case, the credit becomes very risky. It can and will ask you to prepay a part of the loan amount. So that the exposure goes down to 85% again.

[TexasHusker]

While there a lot of dots to connect, the reason home mortgage interest rates are so low is that lenders have a high level of confidence that the debt is appropriately secured, both near and long term. In other words, the lender expects for the property to be worth considerably more in 10-15-20 years.

In most cases, their expectation turns out to be correct.