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A Thorough Guide To Equity Loans

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 may be a first, second or third position lien, but it is most common that they are a second position lien. When you are trying to get a home equity loan you should have reasonable loan-to-value and combined loan-to-value ratios. You will also need a very good credit history as it is required most of the time.

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

A closed end home equity loan is when the borrower receives a lump sum at the time of the closing and cannot borrow anymore. The factors that determine the maximum amount of money that can be borrowed include: appraised value of collateral, income, and credit history. It is not unusual that you will be able to borrow up to 100% of the appraised value of the home; in fact there are lenders that will go above 100% through an over-equity loan. Some states may, however, have a limit on the amount you can borrow.

Open End Loan

With an open end home equity loan a lender sets an initial limit to the credit line based on factors such as credit history and income. Not only that, but the borrower can choose when and how often they borrow against the equity in the property. A home equity line of credit, HELOC, is also known as an open end home equity loan. Just like the closed end home equity loan, it is possible to borrow up to 100% of the value of the home. The lowest possibly monthly payment you can have can be as low as the interest only. The interest rate is most commonly based on a prime rate plus a margin.

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 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.

By: Chris Channing

Learn more about best refinance loans and online loans.

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