Home equity loans are quite popular now-a-days with the majority of home
owners. A home equity loan is a type of loan in which the borrower uses the
equity in their home as the security pledge against the taken loan amounts. The
loans are very helpful in financing major home repairs, medical expenses,
college education and so forth. It creates a lien against the borrower’s house
or home and reduces the actual home equity. The loans are most commonly used as
a second Deed of Trust, though they can be held in first, or in the less
common, 3rd position. Most home equity loans require good to excellent credit
rating history. They require good credit scores and reasonable loan to value
and combined loan to value ratios.
1. Open end home equity loans
This type of home equity loan is actually a revolving credit loan that is also
referred to as home equity line of credit. The borrower can choose when and how
to borrow against the equity in their property. The lender sets an initial
limit to the credit line based to a criteria that closely resembles those of
closed-end home equity loans .With this type of a loan it is possible to borrow
up to 100% of the value of a home less any liens. The minimum monthly payments
can be as low as only the interest that is due.
2. Closed end home equity loans
The applicant normally receives a lump sum at the time of closing and can not
borrow further. The maximum amount of money that can be borrowed is determined
by many variables, for instance the borrower’s income, their credit history,
appraised value of the collateral and so forth. The borrower can borrow up to
100% the value of their homes equity, less any liens. These types of home
equity loans generally have fixed interest rates and can be amortized for
periods of up to 15 years. Some home equity loans offers reduced amortization
whereby at the end the terms, a balloon payments is due. These larger lump-sums
payments can be avoided by paying above the minimum payment or refinancing the
loan. Closed end means there will be an end date for the loan and no future
draws under the loan may occur.
The difference between Home Equity Loan and HELOC
There is a big difference between home equity loan and home equity line of
credit (HELOC). A HELOC is a line of revolving credit that has an adjustable
interest rate whereas a home equity loan is a one time lump sum loan which
often has a fixed interest rate.
Lastly with home equity loans , the borrower has to keep on mind the fact that
long term repayment plans ends up making the loan quite expensive, so the
shorter the repayment durations the lower the interest rate. Moreover, if a
borrower is the home prices goes down when you are about to sell your home, the
seller will ends up loosing.
Aaden Marsh is Advisor of .For any information regarding Home Equity loans, visit