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From Wikipedia, the
free encyclopedia A home
equity loan (sometimes abbreviated HEL) is a type of loan in
which the borrower uses the equity in their home as collateral. These loans
are sometimes useful to help finance major home repairs, medical bills or
college education. A home equity loan creates a lien against the borrower's
house, and reduces actual home equity.
Home equity loans are most commonly second
position liens (second trust deed), although they can be held in first or,
less commonly, third position. Most home equity loans require good to
excellent credit history, and reasonable loan-to-value and combined
loan-to-value ratios. Home equity loans come in two types, closed end
and open end.
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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, but not always, for a shorter term than first mortgages. In the
United States, it is sometimes possible to deduct home equity loan interest
on one's personal income taxes. There
is a specific difference between a home equity loan and a Home Equity Line
of Credit (HELOC). A HELOC is a line of revolving credit with an adjustable
interest rate whereas a home equity loan is a one time lump-sum loan, often
with a fixed interest rate.
When considering a loan, the borrower
should be familiar with the terms recourse and nonrecourse loan, secured and
unsecured debt, and dischargeable and non-dischargeable debt.
US traditional mortgages are usually non
recourse loans. "Nonrecourse debt or a nonrecourse loan is a secured loan
(debt) that is secured by a pledge of collateral, typically real property,
but for which the borrower is not personally liable." A US home equity loan
may be a recourse loan for which the borrower is personally liable. This
distinction becomes important in foreclosure since the borrower may remain
personally liable for a recourse debt on a foreclosed property.
Home equity loans are secured loans. "The
debt is thus secured against the collateral — in the event that the borrower
defaults, the creditor takes possession of the asset used as collateral and
may sell it to satisfy the debt by regaining the amount originally lent to
the borrower." Credit card debt is an unsecured debt such that no
asset has been pledged as collateral for the loan. Using a home equity loan
to pay off credit card debt essentially converts an unsecured debt to a
secured debt.
When deciding upon a type of loan, the
borrower should also consider if the debt is dischargeable in bankruptcy.
For instance, US student loans are "practically non-dischargeable in
bankruptcy".
This is a revolving credit loan, also
referred to as a home equity line of credit, where the borrower can choose
when and how often to borrow against the equity in the property, with the
lender setting an initial limit to the credit line based on criteria similar
to those used for closed-end loans. 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, usually at a variable interest
rate. The minimum monthly payment can be as low as only the interest that is
due.
Typically, the interest rate is based on
the Prime rate plus a margin.
Home
equity loan fees
Here is a brief list of possible fees that
may apply to your home equity loan: Appraisal fees, originator fees, title
fees, stamp duties, arrangement fees, closing fees, early pay-off and other
costs are often included in loans. Surveyor and conveyor or valuation fees
may also apply to loans, some may be waived. The survey or conveyor and
valuation costs can often be reduced, provided you find your own licensed
surveyor to inspect the property considered for purchase. The title charges
in secondary mortgages or equity loans are often fees for renewing the title
information. Most loans will have fees of some sort, so make sure you read
and ask several questions about the fees that are charged
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