What are home equity loans?
April 24th, 2009. Published under Home Equity Loans. No Comments.
A home equity loan is a type of loan that allows homeowners to borrow money by using their home’s equity as collateral. There are many reasons why someone may prefer using these types of loans, some borrowers may use it because they need to borrow large amounts of money or they may be attracted by the lower requirements.
Home equity loans are considered to be a second mortgage. When borrowing from your home equity, a lien is created against your house and it will also reduce the property’s equity. These types of loans are not the same as home equity lines of credit.
Because you are using your home as collateral, these types of loans tend to be easier to acquire. In the case of a default the lender has a very good chance of getting their money back. Also, because your home is at risk you are more likely to make the payments on time.
Home equity loans come in 2 flavors, closed end and open end.
Closed End Home Equity Loan
For this type of loans the recipient gets a lump sum one time but it cannot borrow any further. There are many factors that determine how much money the borrower can receive; some of them are credit history, collateral value and income. In many cases the loan may be up to 100% of the appraised value of the property. It’s important to know that some states regulate how much can be borrowed, for instance the state law in Texas allows borrowers to receive up to 80% of their equity.
Open End Home Equity Loan
An open end loan is also known as a home equity line of credit, where the borrower can define when and how many times to borrow against their home’s equity. These types of loans also rely on similar qualifying criteria as in the closed end loan. One may be able to finance these credit lines in up to 30 years, which usually come in variable APRs.
Equity Loan Advantages
There are many reasons why home equity loans are so attractive, here are some of them:
- These types of loans usually have lower interest rates
- Easier qualifications and requirements
- Sometimes, payments can be deducted from income tax
- Allows borrowers to receive large quantities of money
How can I use a home equity loan?
There are many ways in how one can use these types of loans, here’s a list of the most common uses:
- Home upgrades or mayor repairs
- To cover medial debt
- As down payment for a second home purchase
- As a debt consolidation loan
Finding the best home equity loans
Here’re a few tips on how to find the best loans:
- Shopping around at the most trusted sources, banks, credit unions, etc
- Having a good credit score and history
- Talk with someone of trust that has done a home equity loan
- Educate yourself before doing anything, that’s a good start
Before rushing into a home equity loan, make sure you understand the risks, you are putting your home as security, make sure you can afford it in the first place. Plan ahead.