A home equity loan is taken by a homeowner by pledging his/her house. The house in this case, becomes the collateral. A home equity loan brings about a lien against the debtor’s house and lessens real home equity.
A home equity loan is commonly taken for these reasons:
• Remodeling and renovation of the house
• Paying for a family member’s higher education
• Financing a second home purchase
• Consolidating high-interest debts.
Lender are more liberal with regard to home equity loans as they are considered relatively safe since the collateral is the debtor’s home. Thus borrowers are more likely to make timely payments as there will always be a fear lurking in their minds of losing their place to stay.
There are mainly two types of home equity loans:
1) Closed-end home equity loans
2) Open end home equity loans
In a closed end home equity loan, generally the debtor gets a lump sum at the closing time of the loan and is not allowed to borrow further. The maximum amount that an individual is eligible to borrow is dependent on such variables like credit history, income as well as the appraised collateral value, among other things. It is commonly seen that individuals borrow an amount up to 100% of the home value, minus any liens.
Closed – end home equity loans come with fixed rates and may be amortized for up to 15 years. Certain home equity loans do provide for reduced amortization. In such a case, a large lump sum payment is made towards the end of the tenure of the loan, called a balloon payment.
In an open end home equity loan, the borrower may choose the time as well as the frequency of borrowing against the property’s equity value. The lender sets an initial maximum limit relating to the credit line on the basis of the borrower’s income, and credit history. The open end home equity loans are available for a period up to 30 years, and come with a variable rate of interest. The rate of interest is calculated on the Prime Lending Rate and a margin.
Fees related to home equity loans
Most of home equity loans will have some fees charged. You should make sure to carefully read the terms and conditions and ask questions regarding the fees. Some of the fees that may be included are:
• Appraisal fees
• Title fees
• Originator fees
• Stamp duties
• Closing fees
• Arrangement fees
• Valuation or surveyor fees
For finding the best home equity loan, you should shop around and locate different sources like banks, credit unions and brokers. Make sure that the particular deal is the ideal one for you. You should do a comparative study of offers with those found on various websites as well as advertisements. You must plan your budget beforehand to ensure that the home equity loan does not burden you. Learn to improve your credit score and do take care to ensure that the credit reports are correct.