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by Chris Channing
When a borrower uses the equity in their home as collateral it is known as a home equity loan. Home equity loans are generally used to help finance expensive things such as medical bills, major home repairs, and college education. A lien is created through a home equity loan. A lien is a form of security interest over an item of property to secure a payment. The lien in a home equity loan is created against the borrower’s house, and reduces home equity.
Home equity loans can be first, second, or third position liens. They are generally second position liens. Good to excellent credit history is commonly required when trying to get a home equity loan. Reasonable loan-to-value and combined loan-to-value ratios are also something you may need to get a home equity loan.
There are two types of home equity loans, closed end and open end. Both of these are generally referred to as second mortgages, this is because, like a traditional mortgage, they are secured against the value of the property. Home equity loans tend to be for a shorter term than first mortgages, but sometimes last longer.
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
A borrower chooses when and how often they borrow against the equity in the property through an open end home equity loan. Also the lender sets an initial limit to the credit line bases on factors such as income and credit history. Another name for an open end home equity loan is a home equity line of credit. It is possible that you can borrow up to 100% of the value of the home, much like with a closed end loan. Your monthly payment can be as low as the interest. The interest rate is normally based on a prime rate plus a margin.
There are several fees that can come with a home equity loan. There are appraisal fees, originator fees, title fees, arrangement fees, stamp duties, closing fees, early pay-off, and other costs are often included in loans. There are also surveyor and conveyor or valuation fees, but they may be waived. It is possible to reduce the costs of this fee by finding your own licensed surveyor to inspect the property.
Home equity loans are used so a borrower can use the equity in their home as collateral. There are two different types of home equity loans, closed end and open end. Thought both of them you can borrow up to 100%, or maybe even more, of the value of the home. When getting a home equity loan it is normally required that you have very good credit history and good income. There are several fees that come with home equity loans but it is possible to reduce the cost of some of these fees.
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