Financial Glossary: Home Equity Loan


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Home Equity Loan

Home Equity Loan

A type of Real Estate credit in which the homeowner borrows against the value of his or her residence.

A home Equity lien could be a 1st lien if the home is paid for, a 2nd lien if there is already a 1st mortgage, or, more uncommonly, could be a 3rd lien if the borrower has a home mortgage and home improvement loan.

These loans are sometimes useful to help finance major home repairs, medical bills or college education. A home Equity loan creates a lien against the borrower's house, and reduces actual home Equity.

Home Equity loans are most commonly second Position liens (second Trust deed), although they can be held in first or, less commonly, third Position. Most home Equity loans require good to excellent credit history, and reasonable loan-to-value and combined loan-to-value ratios. Home Equity loans come in two types, closed end and Open end.

Both are usually referred to as second mortgages, because they are secured against the value of the property, just like a traditional mortgage. Home Equity loans and lines of credit are usually, but not always, for a shorter term than first mortgages. In the United States, it is sometimes possible to deduct home Equity loan Interest on one's personal income taxes.

There is a specific difference between a home Equity loan and a Home Equity Line of credit (HELOC). A HELOC is a line of revolving credit with an adjustable Interest rate whereas a home Equity loan is a one time lump-sum loan, often with a fixed Interest rate.

Posted by Privatebanking.com

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