Home equity loan

Home equity loan

A home equity loan (sometimes abbreviated HEL) is a type of loan in which the borrower uses the equity in their home as collateral. These loans are sometimes useful to help finance major home repairs, medical bills or college education. A home equity loan creates a lien against the borrower's house, and reduces actual home equity.

Home equity loans are most commonly second position liens (second trust deed), although they can be held in first or, less commonly, third position. Most home equity loans require good to excellent credit history, and reasonable loan-to-value and combined loan-to-value ratios. Home equity loans come in two types, "closed end" and "open end".

Both are usually referred to as second mortgages, because they are secured against the value of the property, just like a traditional mortgage. Home equity loans and lines of credit are usually, but not always, for a shorter term than first mortgages. In the United States, it is sometimes possible to deduct home equity loan interest on one's personal income taxes.

There is a specific difference between a home equity loan and a Home Equity Line of Credit (HELOC).A HELOC is a line of revolving credit with an adjustable interest rate whereas a home equity loan is a one time lump-sum loan, often with a fixed interest rate.

Closed end home equity loan

The borrower receives a lump sum at the time of the closing and cannot borrow further. The maximum amount of money that can be borrowed is determined by variables including credit history, income, and the appraised value of the collateral, among others. It is common to be able to borrow up to 100% of the appraised value of the home, less any liens, although there are lenders that will go above 100% when doing over-equity loans. However, state law governs in this area; for example, Texas (which was, for many years, the only state to not allow home equity loans) only allows borrowing up to 80% of equity.

Closed-end home equity loans generally have fixed rates and can be amortized for periods usually up to 15 years. Some home equity loans offer reduced amortization whereby at the end of the term, a balloon payment is due. These larger lump-sum payments can be avoided by paying above the minimum payment or refinancing the loan.

Open end home equity loan

This is a revolving credit loan, also referred to as a home equity line of credit, where the borrower can choose when and how often to borrow against the equity in the property, with the lender setting an initial limit to the credit line based on criteria similar to those used for closed-end loans. Like the closed-end loan, it may be possible to borrow up to 100% of the value of a home, less any liens. These lines of credit are available up to 30 years, usually at a variable interest rate. The minimum monthly payment can be as low as only the interest that is due.

Typically, the interest rate is based on the Prime rate plus a margin.

Home equity loan fees

Here is a brief list of possible fees that may apply to your home equity loan:Appraisal fees, originator fees, title fees, stamp duties, arrangement fees, closing fees, early pay-off and other costs are often included in loans. Surveyor and conveyor or valuation fees may also apply to loans, some may be waived. The survey or conveyor and valuation costs can often be reduced, provided you find your own licensed surveyor to inspect the property considered for purchase. The title charges in secondary mortgages or equity loans are often fees for renewing the title information. Most loans will have fees of some sort, so make sure you read and ask several questions about the fees that are charged.

ee also

* Home equity
* Mortgage equity withdrawal

External links

* [http://www.fdic.gov/consumers/consumer/predatorylending/index.html Putting Your Home on the Loan Line is a Risky Business ] - from FDIC


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Look at other dictionaries:

  • home equity loan — ➔ loan1 * * * home equity loan UK US noun [C] FINANCE, PROPERTY ► a loan that uses your home equity as a guarantee that the money you borrow will be paid back: »We purchased a fixed rate home equity loan with a regular payback period …   Financial and business terms

  • home equity loan — see loan Merriam Webster’s Dictionary of Law. Merriam Webster. 1996. home equity loan n …   Law dictionary

  • Home-Equity Loan — A consumer loan secured by a second mortgage, allowing home owners to borrow against their equity in the home. The loan is based on the difference between the homeowner s equity and the home s current market value. The mortgage also provides… …   Investment dictionary

  • home equity loan —    a second mortgage    The security being deferred to the first mortgagee, the terms are onerous and only accepted by those in dire financial straits:     Home equity loan sounded ever so much more palatable than second mortgage . (M. Thomas,… …   How not to say what you mean: A dictionary of euphemisms

  • home equity loan — noun a loan secured by equity value in the borrower s home • Syn: ↑home loan, ↑home equity credit, ↑equity credit line • Hypernyms: ↑consumer credit, ↑loan …   Useful english dictionary

  • Home equity — is the value of a homeowner s unencumbered interest in their property, i.e. the difference between the home s fair market value and the unpaid balance of the mortgage and any outstanding debt over the home. Equity increases as the mortgage is… …   Wikipedia

  • home equity line — n: home equity loan at loan Merriam Webster’s Dictionary of Law. Merriam Webster. 1996 …   Law dictionary

  • home equity line of credit — home equity line of credit: home equity loan at loan Merriam Webster’s Dictionary of Law. Merriam Webster. 1996 …   Law dictionary

  • equity loan — n: home equity loan at loan Merriam Webster’s Dictionary of Law. Merriam Webster. 1996 …   Law dictionary

  • home equity — The current market value of a house minus how much is owed on it. A home equity loan borrows against this amount. Category: Real Estate & Rental Property → Homeowners Nolo’s Plain English Law Dictionary. Gerald N. Hill, Kathleen Thompson Hill.… …   Law dictionary

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