Home Equity Loan: collateral for a loan

HEL or home equity loan is a loan where the collateral for a loan is the borrower’s equity of their homes. Home Equity is considered the value of interest which is unencumbered for the property. It is generally the difference of the market value of the house and the balance unpaid mortgage of the house and the outstanding debt taken over the house. The equity is generally increased as the repayment progresses or the value of the property increases. Typically these loans are taken for financing major repairs at home, college education or huge medical bills. By taking a home equity loan the actual equity of the home reduces as a lien is created for the house. Mostly Home equity loans are taken as liens of second position. They can also be held as first or third position equity liens. The requirement of the home equity is mostly a credit history which is good to excellent and the loan-to-value is reasonable.

Home equity loans can be broadly classified into two categories, open end and closed end home equity loan. The equity of the house can also be used as Home Equity Line of credit which is slightly different from Home equity loan.

Closed End Home Equity loan: In this the borrowers get a lump sum amount of money when the deal of financing is closed and he cannot borrow more on the same home equity. The amount of finance which can be borrowed depends on various factors like income, credit history and the value of the house which is used as collateral. The most common borrowing pattern is up to 100% of the valuation of the house reducing any liens. Some lenders also go more than 100% of the value appraised. This depends on the state law. These loans have rate interest fixed and usually are up to a period of 15 years.

Open Ended Home Equity Loan: This is referred as home equity line of credit and is a revolving credit. The borrower can decide when he wants to borrow and also the number of times he wants to borrow the equity of the house or property. The limit of the credit line is set by the lender on similar criteria as that of the close ended home equity loan. The limit of borrowing is till 100% of the home equity minus any liens. The interest charged is variable and the lines of credit are open up to 30 years. The monthly payment is minimal as only the interest is due. The rate of interest is always based on the Prime rate with a margin.

Fees for the Home Equity loan: The list different fees that may be applicable to the home equity loan are: Originator fees, Appraisal fees, title fees arrangement fees, stamp duties, early pay-off fees and closing fees. The valuation fees and Surveyor fess may also be applicable. Some fees may be optional and depending on the banks or financial institutions may be waived off.