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{{Short description|Type of loan}}
A '''home equity loan''' is a type of [[loan]] in which the borrower uses the [[ownership equity|equity]] in his home as [[collateral (finance)|collateral]]. These loans are sometimes useful for families to help finance major home repairs, medical bills or college educations. A home equity loan creates a lien against the house.
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A '''home equity loan''' is a type of [[loan]] in which the borrowers use the [[Home equity|equity]] of their [[home]] as [[collateral (finance)|collateral]]. The loan amount is determined by the value of the property, and the value of the property is determined by an [[appraiser]] from the lending institution.{{cn|date=July 2019}}
Home equity loans are most commonly second position liens (second trust deed), although they can be held in first or, less commonly, third position. Most home equity loans require good to excellent [[Credit history|credit history]], and reasonable loan-to-value and combined loan-to-value ratios. Home equity loans come in two types, ''closed end'' and ''open end''.


Home equity loans are often used to finance major expenses such as home repairs, medical bills, or college education. A home [[equity loan]] creates a [[lien]] against the borrower's house and reduces actual home equity.<ref>{{cite web|url=http://sharepoint.agriculture.purdue.edu/ces/farmriskmgt/homeequityloan.aspx |archive-url=https://web.archive.org/web/20071225210939/http://sharepoint.agriculture.purdue.edu/ces/farmriskmgt/homeequityloan.aspx |url-status=dead |archive-date=25 December 2007 |title=What is a home equity loan? |work=Retirement and Estate Planning for Families |publisher=Kentucky State University and Purdue University |access-date=7 March 2012 }}</ref>
Both are usually referred to as second [[mortgage]]s, because they are secured against the value of the property, just like a traditional mortgage. Home equity loans and lines of credit are usually, but not always, for a shorter term than first mortgages. In the United States, it is sometimes possible to deduct home equity loan interest on one's personal [[income taxes]].


Most home equity loans require good to excellent [[credit history]], reasonable loan-to-value and combined [[loan-to-value ratio]]s. Home equity loans come in two types: ''closed end'' (traditionally just called a home-equity loan) and ''open end'' (a.k.a. a [[home equity line of credit]] (HELOC)). Both are usually referred to as [[second mortgage]]s, because they are secured against the value of the property, just like a traditional mortgage.


Home equity loans and lines of credit are usually, but not always, for a shorter term than first mortgages. Home equity loan can be used as a person's main mortgage in place of a traditional mortgage. However, one cannot purchase a home using a home equity loan, one can only use a home equity loan to refinance. In the United States until December 31, 2017, it was possible to deduct home equity loan interest on one's personal [[income taxes]]. As part of the 2018 Tax Reform bill<ref>{{Cite web|url=https://www.congress.gov/bill/115th-congress/house-bill/1/text|title=H.R.1 - An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.|website=www.congress.gov|date=22 December 2017|access-date=2017-12-31}}</ref> signed into law, interest on home equity loans will no longer be deductible on income taxes in the [[United States]].
==Closed end home equity loan==
The borrower receives a lump sum at the time of the [[closing]] and cannot borrow further. The maximum amount of money that can be borrowed is determined by variables including credit history, income, and the appraised value of the collateral, among others. It is common to be able to borrow up to 100% of the appraised value of the home, less any [[lien]]s, although there are lenders that will go above 100% when doing '''over-equity loans'''.


⚫
There is a specific difference between a home equity loan and a [[HELOC]]. A HELOC is a line of [[revolving credit]] with an adjustable interest rate whereas a home equity loan is a one time lump-sum loan, often with a fixed interest rate. With a HELOC the borrower can choose when and how often to borrow against the equity in the property, with the lender setting an initial limit to the credit line based on criteria similar to those used for closed-end loans. Like the closed-end loan, it may be possible to borrow up to an amount equal to the value of the home, minus any liens. These lines of credit are available up to 30 years, usually at a variable interest rate. The minimum monthly payment can be as low as only the interest that is due. Typically, the interest rate is based on the prime rate plus a margin.
Closed-end home equity loans generally have fixed rates and can be [[Amortization (business)|amortized]] for periods usually up to 15 years. Some home equity loans offer reduced amortization whereby at the end of the term, a [[Balloon payment mortgage|balloon payment]] is due. These larger lump-sum payments can be avoided by paying above the minimum payment or refinancing the loan.


==Fees==
==Open end home equity loan==
⚫
This is a revolving credit loan, also referred to as a '''home equity line of credit (HELOC)''', where the borrower can choose when and how often to borrow against the equity in the property, with the lender setting an initial limit to the credit line based on criteria similar to those used for closed-end loans. Like the closed-end loan, it may be possible to borrow up to 100% of the value of a home, less any liens. These lines of credit are available up to 30 years, usually at a variable [[interest rate]]. The minimum monthly payment can be as low as only the interest that is due.


A brief list of fees that may apply for home equity loans:
Typically, the interest rate is based on the [[Prime rate]] plus a [[margin]].

* Appraisal fees
* [[Origination fee|Originator fees]]
* Title fees
* [[Stamp duty|Stamp duties]]
* Arrangement fees
* Closing fees
* Early pay-off fee
* Inactivity fee<ref>{{cite web|title=Ask CFPB: What fees can my lender charge if I take out a HELOC?|url=http://www.consumerfinance.gov/askcfpb/249/what-fees-can-my-lender-charge-if-i-take-out-a-heloc.html|website=consumerfinance.gov|publisher=CFPB|access-date=30 December 2015}}</ref>
* Annual or Membership fee

[[surveying|Surveyor]] and [[conveyancing|conveyor]] or valuation fees may also apply to loans but some may be waived. The survey or conveyor and valuation costs can often be reduced, provided one finds a licensed surveyor to inspect the property considered for purchase. The title charges in secondary mortgages or equity loans are often fees for renewing the title information. Most loans will have fees of some sort.{{cn|date=June 2023}}

==See also==

* [[Home equity]]
* [[Home equity line of credit]]
* [[Mortgage equity withdrawal]]
* [[Reverse mortgage]]

==References==
{{reflist}}


==External links==
==External links==
⚫
*[https://www.occ.gov/topics/consumers-and-communities/consumer-protection/mortgages/putting-your-home-on-the-loan-line-is-risky-business.html Putting Your Home on the Loan Line is a Risky Business ] - from OCC
*[http://www.fool.com/homecenter/refinance/refinance02.htm Borrowing against your home] -from Motley Fool website
*[https://www.forbes.com/sites/nickclements/2017/12/28/borrowers-lose-home-equity-tax-deduction/#1736a6986cdf Borrowers Lose Home Equity Tax Deduction]
⚫
*[http://www.fdic.gov/consumers/consumer/predatorylending/index.html Putting Your Home on the Loan Line is a Risky Business ] -from FDIC

*[http://www.homeequitycreditline.org/ Home Equity Credit Line] - A person's experience with home equity credit lines.
{{Consumer debt}}
{{Real estate}}

{{DEFAULTSORT:Home Equity Loan}}
[[Category:Personal finance]]
[[Category:Personal finance]]
[[Category:Mortgage]]
[[Category:Mortgage]]
[[Category:Real estate]]
[[Category:Loans]]

Latest revision as of 11:07, 9 October 2024

A home equity loan is a type of loan in which the borrowers use the equity of their home as collateral. The loan amount is determined by the value of the property, and the value of the property is determined by an appraiser from the lending institution.[citation needed]

Home equity loans are often used to finance major expenses such as home repairs, medical bills, or college education. A home equity loan creates a lien against the borrower's house and reduces actual home equity.[1]

Most home equity loans require good to excellent credit history, reasonable loan-to-value and combined loan-to-value ratios. Home equity loans come in two types: closed end (traditionally just called a home-equity loan) and open end (a.k.a. a home equity line of credit (HELOC)). Both are usually referred to as second mortgages, because they are secured against the value of the property, just like a traditional mortgage.

Home equity loans and lines of credit are usually, but not always, for a shorter term than first mortgages. Home equity loan can be used as a person's main mortgage in place of a traditional mortgage. However, one cannot purchase a home using a home equity loan, one can only use a home equity loan to refinance. In the United States until December 31, 2017, it was possible to deduct home equity loan interest on one's personal income taxes. As part of the 2018 Tax Reform bill[2] signed into law, interest on home equity loans will no longer be deductible on income taxes in the United States.

There is a specific difference between a home equity loan and a HELOC. A HELOC is a line of revolving credit with an adjustable interest rate whereas a home equity loan is a one time lump-sum loan, often with a fixed interest rate. With a HELOC the borrower can choose when and how often to borrow against the equity in the property, with the lender setting an initial limit to the credit line based on criteria similar to those used for closed-end loans. Like the closed-end loan, it may be possible to borrow up to an amount equal to the value of the home, minus any liens. These lines of credit are available up to 30 years, usually at a variable interest rate. The minimum monthly payment can be as low as only the interest that is due. Typically, the interest rate is based on the prime rate plus a margin.

Fees

[edit]

A brief list of fees that may apply for home equity loans:

Surveyor and conveyor or valuation fees may also apply to loans but some may be waived. The survey or conveyor and valuation costs can often be reduced, provided one finds a licensed surveyor to inspect the property considered for purchase. The title charges in secondary mortgages or equity loans are often fees for renewing the title information. Most loans will have fees of some sort.[citation needed]

See also

[edit]

References

[edit]
  1. ^ "What is a home equity loan?". Retirement and Estate Planning for Families. Kentucky State University and Purdue University. Archived from the original on 25 December 2007. Retrieved 7 March 2012.
  2. ^ "H.R.1 - An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018". www.congress.gov. 22 December 2017. Retrieved 2017-12-31.
  3. ^ "Ask CFPB: What fees can my lender charge if I take out a HELOC?". consumerfinance.gov. CFPB. Retrieved 30 December 2015.
[edit]
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