Loans description
A home equity loan is a type of
loan in which the borrower uses the equity in his home
as collateral. These loans are sometimes useful for
families to help finance major home repairs, medical
bills or college educations. A home equity loan creates
a lien against the borrower's house.
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.
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.
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 (HELOC), 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. |
