Home equity loan, which is commonly referred as line of credit, helps in home remodeling, paying off debt by credit card, tuition funds for children or cash reserve during emergency when own home is bought. This is similar to traditional mortgage and in United States the possibility is higher for deduction of this loan interest on the applicant's income taxes. Through this loan, the borrower can avail up to 80 percent of the equity value. As the homeowner uses the home, this loan is collateral and it falls under secured loan category. Actual home equity is reduced by this loan as it forms a lien in opposition to the house of the borrower. These loans require good credit history, reasonable loan value, and combined loan value ratios. Home equity loans are of two types. They are closed and open-ended.

Home equity loans (HEL) of closed end type have fixed rates and a gradual payment period of the debt for 15 years. Home Equity Line of Credit (HELOC) can also be availed up to 30 years at variable interest rates. Generally the rate of interest is on the basis of prime rate with a margin.

The homeowners use own equity for applying for a loan and so the lenders give better rate of interest. Home equity loans and home mortgage loans are not the same as the mortgage loan helps to pay off existing mortgage. Default in loan payment of equity home loan dues can make the homeowner lose his home, as it is collateral for the home loan. They are also referred as second mortgages as a certain amount of finance given must be retuned within a fixed period of time. The amount borrowed is given in full at the beginning with fixed interest rates fixed. Monthly payments are made during the term of the loan.

The lines of credit in home equity approve money in certain quantities, which are allowed to be used for necessities like kitchen updating and repayment of debts. Monthly repayments vary in accordance with the charges of outstanding balance and rate of interest. Some lending companies might limit monthly payment but will not do interest adjustment. Costs involved in home equity loan includes fee for application and property appraisal, points like lending limits, costs of closing like attorney, filing fees etc and annual maintenance or transaction fee per withdrawal.

Comparison of different lending companies is a must before taking a final decision of applying for home equity loan or line of credit. Importance is to be given on factors like Interest rates, fees and other costs between the lending companies. When the amount of money required for specific purpose is known then the best route is home equity loan but the line of credit is to be ensured regarding the expenses required. As there are different types in home equity loans, the research should be focused on rate of interest adjustment, change of interest rate with adjustments, availability of adjustment cap and lifetime cap, borrowing period and renewal, balloon payment and possibility of loan conversion to fixed rate.

When home purchase is done with down payment lesser than 20%, then the lender requires payment for PMI (Private Mortgage insurance). This insurance policy is to protect the investment of the lender if default in payment occurs and the policy is taken on behalf of lenders. PMI is usually included in monthly payment of loan along with Insurance taxes and property taxes of the homeowner.

The lender maintains escrow account and when tax and insurance become due on behalf of the homeowner, the lender pays them. When the home is sold, the left over fund in escrow will be given back to the homeowner.