A loan in which the borrower uses the equity in their home as collateral is known as a home equity loan. Home equity loans can help finance major home repairs, college education, or medical bills. Through a home equity loan a lien is created against the borrower’s house, and actual home equity is reduced. A lien is a type of security interest over an item of property to secure a payment.
Home equity loans are mostly second position liens but they can also be first or third position. To get a home equity loan it is normally required that you have good to excellent credit history. You may also need reasonable loan-to-value and combined loan-to-value ratios.
The two forms of home equity loans are closed end and open end. Both of these types of home equity loans are most commonly second mortgages. Like a traditional mortgage, closed end and open end loans are secured against the value of property. In most cases home equity loans will have shorter terms compared to a first mortgage but in some cases they will have a longer term.
Closed End Loan
Receiving a lump sum at the time of the closing and being unable to borrow more money is done through a closed end home equity loan. There are some things that can affect how much money you may borrow. Things that affect that are credit history, income, and appraised value of collateral. Generally you will be able to borrow up to 100% of the appraised value of the home. It is even possible that a lender will let you borrow over 100% through an over-equity loan.
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 normally used for paying off things that costs a large sum of money. You can choose a closed end or an open end home equity loan. You may be able to borrow up to 100% or over of the value of the home. It’s good to have a good credit history and a steady income if you want to borrow a large percent. Remember to check the loan you are thinking of choosing before you choose it to see what fees may come with it.
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