of loan in which the borrower uses the equity of his or
her home as collateral. The loan amount is determined by the
value of the property, and the value of the property is determined by an
appraiser from the lending institution. 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.
Most home equity loans require good to excellent credit history,
reasonable loan-to-value and combined loan-to-value ratios. Home equity
loans are usually referred to as second mortgages, because they are
secured against the value of the property, just like a traditional mortgage. They
are usually, but not always, for a shorter term than first mortgages. In some
states, like Texas, there are completely separate laws for home equities that
have their own set of restrictions (see Section 50(a)(6), Article XVI, Texas Constitution).