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Home Equity Loan: What Exactly Is It?

Dec 28, 2007
It is almost as if lenders are really keen to advance home equity loans. Don't know what this is? Don't worry, you are not the only home owner out there that has had to stop and ask exactly what a home equity loan is.

These loans have actually become more common over the last 20 years or so. But if you have never needed one before there is no reason for you to know all of the logistics.

Understanding the Home Equity Loan

A home equity loan is a tool to release the embedded equity in your owned home. Another way to look at it is that the homeowner uses the equity in his or her home as collateral. These loans are often taken out by homeowners that need to finance home repairs or remodeling, pay for unexpected medical bills, or even to pay for higher education.

Basically what this type of loan does is create a lien against the home and until it is paid off the actual equity in the home is reduced by the loan amount.

There are several conditions that a borrower must satisfy before they become eligible for a home owner loan. These loans are reserved for those that are and have been in good standing with their mortgage company and also have excellent credit histories. The home equity loan is essentially a second mortgage because they are secured with the value of the home just as a first mortgage is.

Most of the time these loans are not as long term as a first mortgage, meaning they will need to be paid off before the first loan.

Fundamentally, loans on your home's equity are of two categories: open end home equity loans and closed end home equity loans. Open end home equity loans are those that are referred to as a line of credit. With this type of loan the borrower can determine when and how they would like to borrow against the equity in the home.

These loans usually allow for the borrower to borrow 100% of the value of the home and can be made available for up to 30 years with a variable interest rate.

On the other hand you, the borrower, can get a fixed amount at the very first instance with the use of a close-ended loan. The amount that is given is figured by determining the value of the home, the income of the borrower, as well as the credit history. There can be different tenures, but 15 years is a common tenure for a close ended loan.

Just because you can potentially get a loan on the equity of your home does not make it a good idea. Many times homeowners are able to secure a better interest rate on this type of loan than they are on a personal loan, making this a more affordable loan option. Lenders find it standard operating practice, but borrowers call is "hidden fees." So make you understand the complete deal before getting a loan.
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