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A Thorough Guide To Equity Loans

By: Chris Channing A home equity loan is a loan in which the borrower uses the equity in their home as collateral. Medical bills, major home repairs, and college education are examples of what home equity loans can help finance. A lien is a type of security interest over an item of property to secure a payment. Why do you need to know this? A lien is created against the borrower's house, and actually home equity is reduced through a home equity loan.

Home equity loans may be a first, second or third position lien, but it is most common that they are a second position lien. When you are trying to get a home equity loan you should have reasonable loan-to-value and combined loan-to-value ratios. You will also need a very good credit history as it is required most of the time.

Closed end and open end are the two forms of home equity loans. Generally the both of these are referred to as second mortgages. The reason is because they are secured against the value of the property, like a traditional mortgage. Home equity loans may have a longer term than first mortgages but generally they have shorter terms.

Closed End Loan

A closed end home equity loan is when the borrower receives a lump sum at the time of the closing and cannot borrow anymore. The factors that determine the maximum amount of money that can be borrowed include: appraised value of collateral, income, and credit history. It is not unusual that you will be able to borrow up to 100% of the appraised value of the home; in fact there are lenders that will go above 100% through an over-equity loan. Some states may, however, have a limit on the amount you can borrow.

Open End Loan

An open end home equity loan is when the borrower chooses when and how often they borrow against the equity in the property. The lender sets an initial limit to the credit line based on the same factors for closed end loans. An open end home equity loan is also known as a home equity line of credit. Similar to a closed end loan, you may be able to borrow up to 100% of the value of the home. The lowest monthly payment can be as low as the interest that is due. Generally, Prime rate plus a margin bases the interest rate.

Home equity loans generally come with quite a few fees. Some of these fees include: arrangement fees, early pay-off, originator fees, stamp duties, title fees, closing fees, and other costs. There is also a surveyor and conveyor or valuation fees. If you find your own licensed surveyor to inspect the property you may be able to cut the cost of the fee.

Home equity loans are used so a borrower can use the equity in their home as collateral. There are two different types of home equity loans, closed end and open end. Thought both of them you can borrow up to 100%, or maybe even more, of the value of the home. When getting a home equity loan it is normally required that you have very good credit history and good income. There are several fees that come with home equity loans but it is possible to reduce the cost of some of these fees.