A home equity loan is a type of loan in which the borrower uses the equity of his or her home as collateral. The loan amount is determined by the value of the property, Home equity loans are often used to finance major expenses such as home repairs, medical bills, or college education. A home equity loan creates a lien against the borrower's house and reduces actual home equity. Most home equity loans require good to excellent credit history, reasonable loan-to-value and combined loan-to-value ratios.
Home equity loans come in two types:
• Home Equity Loan – A one-time lump sum loan, with a fixed interest rate.
• Home Equity Line of Credit (HELOC) – A line of revolving credit with an adjustable interest rate. With a HELOC, the borrower can choose when and how often to borrow against the equity in the property, with the lender setting an initial limit to the credit line.
Both are usually referred to as second mortgages, however a Home equity can also be a first mortgage if there are no other liens on the property.