Home Equity Loan

By: EconomyWatch Content   Date: 28 December 2009

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A home equity loan or HEL involves the usage of the equity in one’s home as collateral. This loan creates a lien against the borrower’s house and reduces the actual equity value of the home. The equity in one’s home refers to the amount spent to acquire and improve the property. This type of loan can be used for funding major home repairs or college education or for any other purpose. Although these loans can be first position or third position liens, they usually are second position liens.

 

A home equity loan can be closed ended or open ended. It is granted if the applicant has a good to excellent credit history and the loan to value and combined loan to values are reasonable.

 

Features of Home Equity Loan

  • These loans are granted against equity in the applicant’s home

  • These are granted for shorter periods than first mortgages

  • They involve a lump sum amount

  • The interest rate is fixed in most cases

  • It is a secured debt and the property can be sold off by the creditor if the borrower is unable to repay the loan amount

  • The interest on it can be tax deductible in some cases

  • These loans can be used for any purposes 

Home Equity Loan and Home Equity Line of Credit or HELOC

 

While a Home Equity Line of Credit is a line of revolving credit in which the interest rate can be adjusted from time to time, a Home Equity Loan involves the payment of a lump sum amount mostly at a fixed interest rate. In the case of a HELOC, the borrower can choose the frequency and amount to be borrowed against the equity in his property. The lender, however, sets the initial limit to the credit line, based on factors or criteria that are similar to the ones used in the sanction of closed end loans. Both types of loans allow the borrower to take a loan of up to 100% of the value of the home less the value of existing liens, if any.


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