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How Home Equity Loans Work
from: Loan & Credit FactsHome equity loans are loans secured by the equity value in the home of the borrower. The equity is the difference between the claims against the property and the market value of the house.
As collateral, a homeowner uses their homes equity and turns it into cash for things such as home repairs, new furniture, consolidating debts, home additions, education, or even medical bills.
Home equity is not built up quickly or overnight and there are costs involved, so it is very important for people to have very good reasons for taking home equity loans. People normally require excellent credit histories to receive home equity loans.
The two forms of home equity loans are open end and closed end. Just like a traditional mortgage, they secure home equity loans against the properties value so refer to them as second mortgages. A line of credit or home equity loan is sometimes a shorter duration that the first or traditional mortgage.
When homeowners get closed end home equity loans, the borrowers receive a lump amount on approval but are unable to borrow more. Usually the total amount loaned depends upon variables such as the borrowers credit history, collateral appraisal value, income sources and more.
The amount of the home equity loans could be one hundred percent of the homes appraised value less liens the homeowner has on their home. Closed end home equity loans normally have up to a fifteen-year amortization period and fixed rate. Some companies offer borrowers reduced amortization on some home equity loans when a balloon payment becomes due at the end of the term.
Sometimes called a home equity line of credit, open-end home equity loans offer the borrower the option to decide how often to borrow and when to borrow against their properties equity. The lender sets the credit lines initial limit. Usually available up to one hundred percent less any liens on the house value, this is very much like the closed end home equity loans criteria. This line of credit has a variable interest rate and is commonly available up to thirty years.
Some of the home equity loans fees that may apply and are added to the loan includes title fees, stamp duty, originator fees, appraisal fees, early payoff fees, closing fees and arrangement fees. Although sometimes waved, there could also be valuation and surveyor fees added. The valuation and survey costs may be less if the homeowner has the property inspected by his or her own licensed surveyor.
It is important for the borrower/home owner to ask questions and read the fine print.
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