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Basics Of Homeowner Equity Loans

May 13, 2008
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.

The two forms of home equity loans are closed end and open end. Both of these types of home equity loans are most commonly second mortgages. Like a traditional mortgage, closed end and open end loans are secured against the value of property. In most cases home equity loans will have shorter terms compared to a first mortgage but in some cases they will have a longer term.

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

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.
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