What the heck is a home equity loan anyway?
A home equity loan (sometimes abbreviated HEL) is a type of loan in which the borrower uses the equity in their home as collateral. These loans are sometimes useful to help finance major 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 loans are most commonly second position liens (second trust deed), 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 and combined loan-to-value ratios. Home equity loans come in two types, closed end and open end.
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.
“BAY AREA RESIDENTS accustomed to treating their homes like piggy banks could be in for unpleasant surprises as home prices decline in many areas. Not only are banks less willing to issue popular home- equity lines of credit, but some of the nation’s biggest lenders are freezing existing loans.
Countrywide Home Loans, for example, has sent letters to at least 122,000 homeowners nationwide informing them they can no longer draw on their home-equity lines of credit. Many homeowners rely on these pay-as-you-use-them loans to finance things such as remodeling, college tuition and emergency expenses. “
NEW YORK (MarketWatch) — Is home equity the new subprime? Goldman Sachs may think so — the brokerage lowered its 2008 earnings estimate for JP Morgan Chase & Co. to $3.30 from $3.44 Thursday amid warnings that problems in the bank’s home equity loan portfolio could cost it $450 million, more than twice previous estimates.