Additional Resources

  1. Default Probability And Loss Given Default For Home Equity Loans [citeseerx.ist.psu.edu]
  2. Does Servicer Heterogeneity Matter For Loss Given Default On Home ... [coss.fsu.edu]
  3. Home Equity Loans On The Rise [cals.ncsu.edu]
  4. Home Equity, Foreclosures, And Bail'outs [economics.missouri.edu]

Definition

A home equity loan is a type of loan in which the borrower uses the equity of his or her home as collateral. 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.

Home Equity Loan

A home equity loan allows the owners of a home to take a loan against their owned equity value in a property. It is often termed as the second mortgage, because it is taken against the asset of the property. The difference of this loan from the mortgage is that it is a consumer loan, and the borrower is free to use the loan in a number of ways, and does not in fact takes the loan to pay for the property.

Explaining Home-Equity

A home-equity loan can easily be described as a line of credit, which is opened against your home. Since you do not entirely own the house, its value and limits depend on the current state of your equity share against the total value of the house.

Usually the current house values are used when estimating the worth of a property in the case of generating a home equity, and therefore the amount of the mortgage paid back is essentially not important, and rather the percentage of the current ownership is of value. These loans usually have a lower interest rate when compared to credit card loans.

Who Can Get Equity Loans?

Financial institutions are now very strict on selecting the merits of giving away a home equity loan. These loans require a good credit history, and excellent loan to value ratios. Smaller loans therefore are easier to get and similarly, larger properties can allow you to take larger equity loans. These loans are mostly given at shorter terms when compared to the larger terms of the mortgage loans.

A person can also select the home equity loan as the main mortgage option if he initially has the necessary amount to buy a property, but then wants to use that sum for other important reasons.

Types of Home-Equity Loans

There are two basic types of home equity loans. The first type is the close ended loan, which is the traditional type as it is given against the property with a fixed value. The second type in the open end type where home equity is in fact used to open a regular line of credit, where money can be taken and repaid several times. This option is excellent for people, who are looking to refinance properties in order to perform business activities. Home-Equity loans are often termed as refinancing the mortgage.

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