Home equity loan is utilizing the value of the home as collateral to raise money. This line of credit is called equity loan, because the value is arrived at by deducting the value of the current mortgage amount from the market value of the property, which is the equity value of the property. Thus, the hitherto unutilized portion of the property value is also effectively put to use.
The home equity loan amount is usually meant for effecting major home repairs or further construction. Sometimes, equity loan amounts are also taken out to meet medical or educational expenses. Most lenders used to provide loans up to 85% of the value of the home. However, nowadays several lenders grant 100% of the home value as loan.
Home equity loans are of two types, close-ended equity loans and open-ended equity loans. Both are normally termed as second mortgages as they are usually second position liens. However, the collateral can be a first lien, or a second lien, or even a third lien. Home equity loans are generally of shorter duration, compared to mortgages, but not necessarily so.
Close-Ended Home Equity Loans
In close-ended loan schemes, the borrower receives a predetermined amount at the time of closing of the agreement. The equity loan amount is arrived at, taking into consideration the credit history and income of the borrower, as well as the appraised value of the property. A borrower can get up to 100% of the value of the collateral, though any other lien amounts on the property would be deducted while computing. In certain cases, the lender may even grant more than 100% of the value, indeed, up to 125% of the value, which is called over-equity loan. Close-ended loans invariably have fixed interest rates, with periods of repayments generally extending up to 15 years.
Open-Ended Home Equity Loans
Open-ended loans are more like a revolving credit facility. They are also called Home Equity Line Of Credit (HELOC). The lender fixes a maximum amount of credit. The borrower can decide when and how much he can borrow against the credit allowed to him. Open-ended loans often have variable interest rates, which are normally the prime interest rate plus a nominal profit margin. The period of repayment can extend up to 30 years in this scheme.
Fees For Home Equity Loans
In most of the equity loan programs, several types of fees are included in the loan amounts. Some of them are appraisal fees, title fees, stamp duties, originator fees, arrangement fees, closing fees, and early pay-off costs. Surveyor fees and valuation fees may also be added in specific cases, or they may be waived. As such, at the time of applying for the loan itself, it would be better to clarify in detail the various fees that are likely to be charged.
Home Equity Loans Consolidation
Some homeowners resort to consolidation of their first and second mortgages in order to make a single monthly payment. Even though this might result in higher interest rates and longer repayment periods, their intention is to take advantage of the lower monthly payments in this consolidation program.
Advantages of Home Equity Loans
Home equity loans have several plus points compared to unsecured loans or credit card loans. The lenders charge much lower rates of interest, because the loans are fully securitized. Further, they allow longer periods of repayments, resulting in lower monthly repayments. The granting of equity loans is a much easier process due to the availability of collateral, even to persons with less than full repute credit image. The hitherto unutilized amount of the property value is opened for use. The amount of loan that can be raised is usually much larger than unsecured credits or credit card loans. In the United States, it is also sometimes possible to declare the equity loan interest as tax deductible. Hence, considering all aspects, home equity loan is one of the best avenues of raising money that is affordable and easy on the monthly budget.