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Home Equity Loans
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Published: July 23, 2007
A home equity loan is an option for home owners who need money to pay for home improvements, pay off high-interest debts, or to make a large purchase like buying a second home. A lien is taken against the equity, or the current market value of the home minus the debts still owed on the property.
It is common for borrowers to get up to 100% of the equity value in a home equity loan. These loans generally offer lower interest rates than credit cards and the interest paid to the lender is usually tax-deductible. There are two types of home equity loans; closed end and open end.
A closed end home equity loan gives the borrower a lump sum of money at the time of closing, or signing the deal. The borrower cannot get any further money. The maximum amount of the loan is determined by the borrower's credit history, income and the appraised value of the collateral home. Closed end home equity loans usually have a fixed interest rate and are amortized (the sum of the loan is broken down into smaller amounts that are paid on a regular schedule) over time, up to 15 years. Sometimes the loan agreement provides for smaller amortization but requires a large sum, called a balloon payment, to be paid promptly at the end of the loan term.
An open end home equity loan, sometimes called a home equity line of credit, works much like a credit card. The borrower chooses when, how often and how much to borrow against the equity of the property as long as the total amount of money borrowed does not exceed the limit set by the lender. The limit is set using the same criteria that determines a closed end home equity loan. An open end home equity loan is usually available for up to 30 years and has a variable interest rate.
Sometimes the lending bank offers interest-only periods on home equity loans. If the loan is at a low interest rate, it may be in the borrower's best interest to seek this type of arrangement. It allows the borrower to pay only interest or the interest plus as much or as little of the principal balance as they want for a set amount of time during the loan pay-back period. The money that would have been spent paying back the home equity loan can then be used to pay off higher-interest debts like credit cards or can be invested to make the borrower more money than they are being charged for the loan. Interest-only home equity loans are also a smart move for people who plan to keep the home less than 10 years. The average home owner keeps the same house for only 5-7 years. If the home is not going to be kept by the borrower for the life of the loan, they might as well save on house payments by paying only the interest.
A home equity loan can provide low-interest financing for any big purchase, including renovations and additions to the home, buying a second home, or a child's college education. It is important for a borrower to determine if a closed end or open end home equity loan is right for their situation and if they should apply for interest-only payments.
Applying for a home equity loan is usually simple and requires personal information including social security number for a credit report, income and information about the property. Any potential borrower should be wary of a lender that is trying to get them to pad their income on the application because they could be an abusive or exploitative lender. These lenders want the borrower to get approved for a loan that they cannot afford. The lender forecloses when the borrower can no longer make payments and the borrower loses their home and its equity. However if a borrower is sure that making payments will not be a problem, a home equity loan can help relieve debt pressure or improve the home and its value.
Sources:
"FTC Facts for Consumers: Home Equity Loans: Borrowers Beware!" Federal Trade Commission. April 1998. Federal Trade Commission. 9 July 2007.
http://www.ftc.gov/bcp/conline/pubs/homes/eqscam s.pdf
"Quicken Loans: America's Home Loan Experts." 2007. Quicken Loans, Inc. 9 July 2007.
http://www.quickenloans.com/
"Home Equity Loan." Wikipedia. June 2007. Wikimedia Foundation, Inc. 9 July 2007.
http://en.wikipedia.org/wiki/Home_Equity_Loan
A closed end home equity loan gives the borrower a lump sum of money at the time of closing, or signing the deal. The borrower cannot get any further money. The maximum amount of the loan is determined by the borrower's credit history, income and the appraised value of the collateral home. Closed end home equity loans usually have a fixed interest rate and are amortized (the sum of the loan is broken down into smaller amounts that are paid on a regular schedule) over time, up to 15 years. Sometimes the loan agreement provides for smaller amortization but requires a large sum, called a balloon payment, to be paid promptly at the end of the loan term.
An open end home equity loan, sometimes called a home equity line of credit, works much like a credit card. The borrower chooses when, how often and how much to borrow against the equity of the property as long as the total amount of money borrowed does not exceed the limit set by the lender. The limit is set using the same criteria that determines a closed end home equity loan. An open end home equity loan is usually available for up to 30 years and has a variable interest rate.
Sometimes the lending bank offers interest-only periods on home equity loans. If the loan is at a low interest rate, it may be in the borrower's best interest to seek this type of arrangement. It allows the borrower to pay only interest or the interest plus as much or as little of the principal balance as they want for a set amount of time during the loan pay-back period. The money that would have been spent paying back the home equity loan can then be used to pay off higher-interest debts like credit cards or can be invested to make the borrower more money than they are being charged for the loan. Interest-only home equity loans are also a smart move for people who plan to keep the home less than 10 years. The average home owner keeps the same house for only 5-7 years. If the home is not going to be kept by the borrower for the life of the loan, they might as well save on house payments by paying only the interest.
A home equity loan can provide low-interest financing for any big purchase, including renovations and additions to the home, buying a second home, or a child's college education. It is important for a borrower to determine if a closed end or open end home equity loan is right for their situation and if they should apply for interest-only payments.
Applying for a home equity loan is usually simple and requires personal information including social security number for a credit report, income and information about the property. Any potential borrower should be wary of a lender that is trying to get them to pad their income on the application because they could be an abusive or exploitative lender. These lenders want the borrower to get approved for a loan that they cannot afford. The lender forecloses when the borrower can no longer make payments and the borrower loses their home and its equity. However if a borrower is sure that making payments will not be a problem, a home equity loan can help relieve debt pressure or improve the home and its value.
Sources:
"FTC Facts for Consumers: Home Equity Loans: Borrowers Beware!" Federal Trade Commission. April 1998. Federal Trade Commission. 9 July 2007.
http://www.ftc.gov/bcp/conline/pubs/homes/eqscam s.pdf
"Quicken Loans: America's Home Loan Experts." 2007. Quicken Loans, Inc. 9 July 2007.
http://www.quickenloans.com/
"Home Equity Loan." Wikipedia. June 2007. Wikimedia Foundation, Inc. 9 July 2007.
http://en.wikipedia.org/wiki/Home_Equity_Loan
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