What Are Home Equity Loans

A home equity loan is a kind of loan in which the debtor puts of his or her home equity as collateral. This kind of loan reduces actual home equity by creating a lien against the borrower’s house. People avail of home equity loans to help finance large-scale home repairs, college fees and doctor’s bills. Most home equity loans require really good credit history. They come in closed and open end types.
Both closed and open end home equity loan types are commonly known as second mortgages, because just like a mortgage, the value of the property is held up as collateral. These loans are usually for a shorter term than traditional mortgages.
In closed end home equity debts, the debtor gets a huge amount at the closing time and cannot avail of any further sums. How much is lent depends on several factors, such as income, credit history, the value of the collateral, etc. These loans generally have fixed rates of interest. An open end home equity loan allows the debtor to choose how often to borrow and how much to borrow against the debtor’s property. The interest is usually based on a prime rated coupled with a margin. The lines of credit of an open end home equity loan are usually available till 30 years and at a variable rate of interest. The cost of doing business with high cost lenders is very huge and can prove to be draining, thus shopping around for the best lender is advisable. Borrowing from a lender who uses your home as security against a high cost loan is very risky – it could lead to the loss of the home and the money. Home equity loan fees may originate from several sources, some include – early pay-offs, stamp duties, title fees, closing and appraisal fees, etc. Most loans, in fact, have additional fees of some sort or the other, and it is safest to know about them in advance and ask as many questions as you can before paying anything. There maybe limitations to the number of home equity loans you may borrow, and the number of time you can refinance them in a year. Thus, taking your time to choose the best lender works better than choosing rashly, because a number of factors such a prepayment penalty and other such aspects need to be worked out. It’s best not to fill out any forms until you’re absolutely sure about the company you’ve picked out.