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. The maximum amount of money that can be borrowed is determined by various 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 liens, although there are lenders that will go above 100% when doing over-equity loans.

Closed-end home equity loans generally have fixed rates and can be 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 is due. These larger lump-sum payments can be avoided by paying above the minimum payment or refinancing the loan.

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 a 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