Home Equity Loans

A home equity loan is a type of loan in which the borrower uses the equity in their home as collateral. These loans are often used to help finance major home repairs, medical bills or a child's college education. A home equity loan creates a lien against the borrower's house, and reduces their actual home equity.

Home equity loans are most commonly second position liens, 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 ratios. They come in two types, closed end and open end.

In a closed end loan, the borrower receives a lump sum at the time of the closing and cannot borrow further. In an open end loan, the borrower can choose when and how often to borrow against the equity in the property. 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.

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