UK Accounting Glossary
Home equity loans are a type of loan that is secured by the equity of the borrower’s principal residence. Home equity loans can be structured with a line of credit (i.e. Home Equity Line of Credit – HELOC) or with a one-time cash payment (i.e. Fixed Rate Home Equity Loan or second mortgage). Some reasons property owners may take out home equity loans are to make improvements on their home, consolidate debt, or pay for college tuition. Home equity loans are calculated based on the difference between what’s owed on the primary mortgage loan and the actual property value (i.e. FMV). Lenders also factor in loan to value ratio (i.e. LTV ratio) and outstanding liens on the property in home equity loans calculation. Home equity loans do place a second lien on the property so home equity loans that cannot be paid off may result in the sale of the borrower’s principal residence. When home equity loans qualify as home equity debts (per IRS publication 936, Part II), borrowers can get some tax relief, subject to IRS limits (i.e. $100,000 in 2010 for a married couple).
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This glossary post was last updated: 9th February 2020.