What is a home equity loan?

When you own a home the portion of its value that you own is considered your equity. Generally you build equity by paying down your mortgage or by your home appreciating in value.

A home equity loan is a loan that uses your equity in your home as collaterol. If you fail to repay the loan your lender can go after your home. Another name for a home equity loan is a second (or sometimes third) mortgage.

Secured loans (ones with colaterol like home equity loans) generally have better rates and terms than unsecured loans (e.g. credit cards or lines of credit).

A danger of borrowing against the entire value of your home is that if it drops in value you can be “upside down” or owe more money than it is worth. This is a big part of the current crisis in sub-prime mortgages.

Texas used to be the only state that didn’t allow home equity loans. Now Texas allows home equity loans but only up to 80% of the value of your home.