Home Equity Loans

A home equity loan is when the equity of the borrower's home is used as collateral to obtain the loan.  Basically, a home equity loan is a lien against your home and if you don't keep up with home equity loan payments, they can take your house as payment. 

Home equity loans are often useful to obtain the funds to do costly home repairs, pay for college education expenses, medical bills, or consolidate other, higher interest debt (like credit cards).  Home equity loans can be a great money management tool, and enable you to pay off your debt or help to make your monthly debt  and expenses more manageable. 

There are two main types of home equity loans, called closed end and open end.  They're available to home owners with good credit (although some bad credit home equity loan programs exist).

Closed End Home Equity Loan

A closed end home equity loan is when the borrower receives the entire amount of the loan in a single payment at the closing, and that is all that can be borrowed.  The maximum amount of the home equity loan and the home equity loan rates are based on several factors including the borrowers income level, the appraised value of the home, and the credit history of the borrower.  In many cases, a home equity loan can be taken up to 100% of the appraised value of the home, except for home equity loans in Texas.  Texas state law indicates that borrowers can only obtain up to 80% of the equity in their home; which is an improvement as there was a time when a home equity loan in Texas wasn't even allowed!

Most home equity loan rates are fixed, and are amortized for a maximum of 15 years.  Some equity loans have reduced amortization and end with a balloon payment that can be avoided by paying more than the home equity loan payment, or with home equity loan refinancing.

Open end Home Equity Loan

An open end home equity loan is sometimes called "a home equity line of credit'.  Lenders set a maximum limit of the credit line, and then borrowers can decide how often and how much to borrow against the equity of their home.  Home equity lines of credit are usually available for 30 years, and have variable interest rates based on the prime rate plus a margin amount.  One advantage of home equity lines of credit is that their monthly payments are sometimes as low as the home equity interest that's due.

Home Equity Loan Fees

There are many fees that you may be charged in order to obtain a home equity loan.  Typical fees include, but may not be limited to:

• Home Appraisal fees
• Originator fees
• Stamp duties
• Title fees
• Closing Fees
• Arrangement fees
• Early pay-off penalties
• Surveyor/conveyor valuation fees

Fees applied to home equity loans are typically less than the original fees paid for your mortgage closing, but it's always best to research all the potential fees associated with obtaining a home equity loan before you sign for one- just in case the fees are more than you expected!