Home equity loan

A home equity loan is a type of loan in which the borrower uses the equity in his home as collateral. These loans are sometimes useful for families to help finance major home repairs, medical bills or college educations.

Closed end home equity loan

The borrower receives a lump sum at the time of the closing and cannot borrow further. It is possible to borrow up to 100% of the assessed value of the home, less any liens. These fixed rate loans can be amortized up to 15 years with a 3, 5, or 7-year balloon payment. When the balloon balance is due, the borrower can pay off the balance or refinance.

Open end home equity loan

This is a revolving credit loan where the borrower can choose when and how often to borrow against the equity in the property. Like the closed end loan, it may be possible to borrow up to 100% of the value of your home, less any liens. These lines of credit are available up to 30 years at a competitive variable interest rate. The minimum monthly payment can be as low as only the interest that is due.

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 for a shorter term than first mortgages. Some people are able to deduct home equity loan interest on their personal income taxes.

External link

• Borrowing against your home -from Motley Fool website