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A home equity loan is a type of LOAN in which the borrower uses the EQUITY of his or her HOME. The loan amount is determined by the value of the property, and the value of the property is determined by an appraiser from the lending institution. 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. oth are usually referred to as SECOND MORTAGES, 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. Home equity loan can be used as a person's main mortgage in place of a traditional mortgage. However, one cannot purchase a home using a home equity loan, one can only use a home equity loan to refinance. In the United States until December 31 2017, it was possible to deduct home equity loan interest on one's personal INCOME TAXES. As part of the 2018 Tax Reform billsigned into law, interest on home equity loans will no longer be deductible on income taxes.
A HELOC is a line of RESOLVING CREDIT with an adjustable interest rate whereas a home equity loan is a one time lump-sum loan, often with a fixed 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 based on criteria similar to those used for closed-end loans. Like the closed-end loan, it may be possible to borrow up to an amount equal to the value of the home, minus any liens.
In the UK an "Equity Loan" is the term used to describe additional borrowing, normally secured as a subsequent charge, as a top-up to the amount a home owner/purchaser can borrow from a main mortgage provider. Often used by builders to encourage house sales but now also used by the UK governments to assist purchasers who would otherwise be unable to buy with only a conventional main mortgage. In England such loans are managed on behalf of the government by the Homes & Communities Agency. Devolved governments have their own separate schemes.
Elsewhere in the world an equity loan may refer to a MORTAGE LOAN in which the borrower receives MONEY. Typically the loan is secured by REAL ESTATE already owned outright.