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Home equity loan

A home equity loan or "home equity line of credit" (HELOC) is a loan backed by the equity accumulated in the value of your home.

Expanded Definition

Many home owners originally purchase their homes with a sizeable mortgage with the result that equity in their home is little more than the downpayment. As time passes, the mortgage payments gradually pay down the debt protion of the home and increase the equity portion. In addition, the tendency of market prices of real estate to increase means that as time goes on your home value increases. Hence, your equity increases due to the paper profits you have on the value of your home.

A home equity loan allows you to tap the accumulated equity in your home and convert it to cash. Typically you enter into a second mortgage backed by the equity in your home.

Because mortgage interest on your home is deductible on your federal income tax return and many other loans (including auto loans) are not, many have used home equity loans to finance a variety of purchases or even to pay down other high interest loans such as credit card debt.

In 2008, a dramatic decline in real estate market values caused many to become over extended, and many of those who sought overweening home equity loans lost their homes to foreclosure. This situation emphasized the need to seek reasonable -- even conservative -- home equity loans. They can be attractive in some situations, but if you put yourself in the wrong circumstances, they can cause you to lose your home.

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