Home equity loan

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 lloans 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.

There is a specific difference between a home equity loan and
a Home Equity Line of Credit. A HELOC is a line of revolving
credit with an adjustable interest rate whereas a home equity
loan is a one time lump-sum loan, often with a fixed interest
rate.

When considering a loan, the borrower should be familiar with
the terms recourse and nonrecourse loan, secured and unsecured
debt, and dischargeable and non-dischargeable debt.

US traditional mortgages are usually non recourse loans.
"Nonrecourse debt or a nonrecourse loan is a secured loan
(debt) that is secured by a pledge of collateral, typically
real property, but for which the borrower is not personally
liable." A US home equity loan may be a recourse loan for
which the borrower is personally liable. This distinction
becomes important in foreclosure since the borrower may
remain personally liable for a recourse debt on a foreclosed
property.

Home equity loans are secured loans. "The debt is thus secured
against the collateral — in the event that the borrower defaults,
the creditor takes possession of the asset used as collateral
and may sell it to satisfy the debt by regaining the amount
originally lent to the borrower." Credit card debt is an
unsecured debt such that no asset has been pledged as
collateral for the loan. Using a home equity loan to pay
off credit card debt essentially converts an unsecured
debt to a secured debt.

When deciding upon a type of loan, the borrower should
also consider if the debt is dischargeable in bankruptcy.
For instance, US student loans are "practically non-dischargeable in bankruptcy".