Home Equity Loans

Title : All You Wanted to Know about Home Equity Loans

Author : Debbie Groves


Home Equity Loans are extremely useful as you can use the equity in your home as collateral against the loan. These kind of loans are used for a majority of purposes like home repairs, medical bills etc. But it brings about a lien and reduces the home equity.

Home equity loans as second mortgages

A home equity loan is secured against the property value, quite like a traditional mortgage. This loan usually is for a shorter term than the first mortgages, though not always. However, the US tax laws allow you to deduct the home equity loan interest from your personal income tax.

Home equity loans as second position liens

You will also find home equity loans as a second trust deed or a second position lien, with the option of being held in the first or in some cases in the third position. The majority of the home equity loans need a fabulous credit background as well as a reasonable loan-to-value and merged loan-to-value ratios.

The two kinds of home loans

[1] Open end home equity loan: Open end home equity loans are revolving credit loans and thus can also be called home equity line of credit (HELOC). The borrower here is offered the option to choose when and how he would like to borrow against the equity in the property. The lender sets an original limit to the credit line and the criteria applicable for this is similar to that of a closed end home equity loan.

It is also possible for you to borrow 100% of the home value at the maximum, and that too without any liens. These lines of credit are available for a maximum period of 30 years, most often at a variable interest rate. The minimum monthly payment can be quite low, with you having to fish out only the interest that is due.

The interest rate is usually based on the Prime Rate together with a margin.

[2] Closed end home equity loan: This kind of home equity loan enables the borrower to receive a lump sum during the closing and prevents the borrower from borrowing further. The maximum money that can be borrowed is determined by several variables, including credit history, income, and the evaluated value of the collateral.

It is though common to borrow a maximum of 100% of the assessed value of the home, without any liens; however, there are lenders who will go over 100% during doing the over-equity loans. The state law governs, as Texas allows borrowers to borrow a maximum of 80% of the equity.

Closed end home equity loan rates are usually fixed and you have an option to liquidate them for a maximum period of 15 years. There are certain home equity loans that provide decreased liquidation and at the end of the term, a huge payment is due. These lump sum payments can be avoided if you pay more than the minimum payment or consider refinancing the loan.

Fees of the home equity loans

Home equity fees that may be applicable include originator fees, appraisal fees, stamp duties, title fees, closing fees, early pay-off, arrangement fees and other costs. Conveyor and surveyor or valuation fees can also be applicable to the loans.