What is a home equity loan?


A home equity loan is a loan taken against the equity you have in your house. In other words, your house serves as collateral in a loan arrangement. A second mortgage very closely resembles what a home equity loan usually is. They are both loans against your equity and both come in a second lien position. However, it is possible to take a HEL or HELOC to purchase a house.

Home equity loans enjoy tax-deductibility as first mortgage loans do in case they are used as first lien on the property. Interest is deductible for up to $1 mil purchases in that case. In case the home equity loan comes in a second lien position, tax deductiility usually applies for the first $100,000 only.

If you have 40% equity in your house worth $400,000 you can borrow up to $160,000 with a 100% home equity loan. If you go over equity, you could borrow up to 125% of your house value. In this case, this means you could borrow up to $260,000.

While home equity loans are a favorite instrument to cash equity, they are secured loans and failure to repay them properly puts your house on the line.

Open end home equity loans can be used much as credit cards; home equity lines of credit (HELOCs) and home equity loans (HELs) can be refinanced similar to any other loan.

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