Home Equity Loans
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.
Excerpt from "Home equity loan." Wikipedia, The Free Encyclopedia.
18 Oct 2006, 05:09 UTC. Wikimedia Foundation, Inc. 27 Oct 2006
http://en.wikipedia.org/w/index.php?title=Home_equity_loan&oldid=8215212
