A home equity loan is a type of
loan
In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money.
The document evidencing the deb ...
in which the borrowers use the
equity of their
home
A home, or domicile, is a space used as a permanent or semi-permanent residence for one or more human occupants, and sometimes various companion animals. Homes provide sheltered spaces, for instance rooms, where domestic activity can be p ...
as
collateral. The loan amount is determined by the value of the property, and the value of the property is determined by an
appraiser from the lending institution.
Home equity loans are often used to finance major expenses such as home repairs, medical bills, or college education. A home
equity loan creates a
lien
A lien ( or ) is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation. The owner of the property, who grants the lien, is referred to as the ''lienee'' and the pers ...
against the borrower's house and reduces actual home equity.
Most home equity loans require good to excellent
credit history, reasonable loan-to-value and combined
loan-to-value ratios. Home equity loans come in two types: ''closed end'' (traditionally just called a home-equity loan) and ''open end'' (a.k.a. a
home equity line of credit (HELOC)). 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. Home equity loan can be used as a person's main mortgage in place of a traditional mortgage. However, one cannot purchase a home using a home equity loan, one can only use a home equity loan to refinance. In the United States until December 31, 2017, it was possible to deduct home equity loan interest on one's personal
income taxes
An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...
. As part of the 2018 Tax Reform bill signed into law, interest on home equity loans will no longer be deductible on income taxes in the
United States
The United States of America (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 U.S. state, states and a federal capital district, Washington, D.C. The 48 ...
.
There is a specific difference between a home equity loan and a
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. With a HELOC 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 an amount equal to the value of the home, minus 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.
Fees
A brief list of fees that may apply for home equity loans:
* Appraisal fees
*
Originator fees
* Title fees
*
Stamp duties
* Arrangement fees
* Closing fees
* Early pay-off fee
* Inactivity fee
* Annual or Membership fee
Surveyor and
conveyor or valuation fees may also apply to loans but some may be waived. The survey or conveyor and valuation costs can often be reduced, provided one finds a 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.
See also
*
Home equity
*
Home equity line of credit
*
Mortgage equity withdrawal
*
Reverse mortgage
References
External links
Putting Your Home on the Loan Line is a Risky Business - from OCC
Borrowers Lose Home Equity Tax Deduction
{{DEFAULTSORT:Home Equity Loan
Personal finance
Mortgage
Loans