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A home equity loan is a loan in which the borrower uses the equity in their home as collateral. Medical bills, major home repairs, and college education are examples of what home equity loans can help finance. A lien is a type of security interest over an item of property to secure a payment. Why do you need to know this? A lien is created against the borrower’s house, and actually home equity is reduced through a home equity loan.

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.

Closed end and open end are the two forms of home equity loans. Generally the both of these are referred to as second mortgages. The reason is because they are secured against the value of the property, like a traditional mortgage. Home equity loans may have a longer term than first mortgages but generally they have shorter terms.

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.

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.

In conclusion a home equity loan can be used for things such as a repair on your house. It is possible to get up to 100% or over of the value of the home. There are closed end and open end home equity loans. Your credit history and your income are major factors in determining how much you can borrow. There are also a number of fees that may be associated with your home equity loan.