Home equity loans are a kind of loan that uses the equity found in your home as collateral for the loan itself. Lots of times, a home equity loan is the type of loan someone gets when they need to finance major repairs on their home, pay for college, or pay off medical bills. When one takes out a home equity loan, a lien is created on the person’s house, which lowers the actual equity in the home.
Common Uses of Home Equity Loans
Usually, home equity loans are used as second position loans, but they can also be first or less commonly, third position liens. To secure a home equity loan, lenders usually require either very good or excellent credit history, and also reasonable combined loan-to-value and certain loan-to-value ratios. There are two loan types available: open-end loans and closed end loans.
For the most part, home equity loans are known as second mortgages, since they are gotten through the borrower’s property value, much as a traditional mortgage is secured. Lines of credit and home equity loans are most usually for a term that is shorter than a first mortgage, but this isn’t always the case. In the U.S., sometimes a person can actually deduct the interest from home equity loans on their personal income taxes.
Home Equity Loans Vs. Lines of Credit
Home equity lines of credit and home equity loans, have certain differences. A home equity loan is just a single payment loan, usually featuring interest that is set at a fixed rate, and A HELOC is a type of revolving credit that has an interest rate that adjusts.
Before attempting to secure a home equity loan, borrowers need to know certain terms like nonrecourse and recourse loans, unsecured and secured debt, and debt that is non-dischargeable, and debt that is dischargeable.
Most of the time, traditional mortgages in the U.S. are non-recourse loans. This means that it is a loan that is secured through collateral, usually real property, but in which the borrower isn’t found personally liable. However, a home equity loan could be a recourse loan in which the borrower is liable for the debt.
Home equity loans are always secured loans. This means that if the loan is not paid back, then the creditor is in a position to take the collateral that was used to secure the loan in the first place. They can then sell it to get the money they are owed.
It is very important for borrowers to find out if the loan they take out is dischargeable in bankruptcy. For the most part, student loans in the U.S. are non-dischargeable.
A home equity line of credit is a revolving credit loan, which gives the borrower the choice of when and how often they want to borrow against the equity that is found in their property. The lender is the one that decides the initial limit of the credit line using basically the same criteria as is used for loans that are closed ended. These credit lines can be gotten for up to 30 years, generally at a variable interest rate.
By knowing as much as you can about home equity loans, you will have the tools needed to make the right decision for you and your individual situation.