The following paragraphs summarize the work of experts who are completely familiar with all the aspects of home equity loans. Heed their advice to avoid any surprises.
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.
Here are 2 definitions:
A collateral is property that you pledge as a guarantee that you will repay a debt. If you don't repay the debt, the lender can take your collateral and sell it to get its money back. With a home equity loan or line of credit, you pledge your home as collateral. You can lose the home and be forced to move out if you don't repay the debt.
An equity is the difference between how much the home is worth and how much you owe on the mortgage (or mortgages, if you have more than one on the property).
Most home equity loans are 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.
The two 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
Borrower will 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 for many years was the only state not to allow home equity loans) only allows borrowing up to 80% of equity.
Think about what you've read so far. Does it reinforce what you already know about home equity loan? Or was there something completely new? What about the remaining paragraphs?
A 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
By nature it 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.
Home Equity Loan Fees
Please take a look here. This 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.
That's how things stand right now. Keep in mind that any subject can change over time, so be sure you keep up with the latest news.