Home equity loan
Encyclopedia
A home equity loan is a type of loan
in which the borrower uses the equity
in their home as collateral
. These loans are useful to finance major expenses such as home repairs, medical bills or college education. A home equity loan creates a lien
against the borrower's house, and reduces actual home equity.
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.
There is a specific difference between a home equity loan and a home equity line of credit (HELOC). A HELOC is a line of revolving credit
with an adjustable interest rate whereas a home equity loan is a one time lump-sum loan, often with a fixed interest rate. This is a revolving credit loan, also referred to as a home equity line of credit, 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.
Surveyor and conveyor or valuation fees may also apply to loans but 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.
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
in which the borrower uses the equity
Home equity
Home equity is the market value of a homeowner's unencumbered interest in their real property—that is, the difference between the home's fair market value and the outstanding balance of all liens on the property. The property's equity increases as the debtor makes payments against the...
in their home as collateral
Collateral (finance)
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
. These loans are useful to finance major expenses such as home repairs, medical bills or college education. A home equity loan creates a lien
Lien
In law, a lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation...
against the borrower's house, and reduces actual home equity.
Most home equity loans require good to excellent credit history
Credit history
Credit history or credit report is, in many countries, a record of an individual's or company's past borrowing and repaying, including information about late payments and bankruptcy...
, 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
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
, 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.
There is a specific difference between a home equity loan and a home equity line of credit (HELOC). A HELOC is a line of revolving credit
Revolving credit
Revolving credit is a type of credit that does not have a fixed number of payments, in contrast to installment credit. Examples of revolving credits used by consumers include credit cards. Corporate revolving credit facilities are typically used to provide liquidity for a company's day-to-day...
with an adjustable interest rate whereas a home equity loan is a one time lump-sum loan, often with a fixed interest rate. This is a revolving credit loan, also referred to as a home equity line of credit, 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
A brief list of fees that may apply for home equity loans:- Appraisal fees
- Originator fees
- Title fees
- Stamp duties
- Arrangement fees
- Closing fees
- Early pay-off fee
Surveyor and conveyor or valuation fees may also apply to loans but 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.