Home Equity Loans

What is a Home Equity Loan?

"A home equity loan is a type of loan in which the borrower uses the equity in their home as collateral. These loans are sometimes useful for families to help finance major home repairs, medical bills or college educations. A home equity loan creates a lien against the borrower's house". (from Wikipedia: Home Equity Loans 3/26/07)

Usually, a home equity loan can be called a second mortgage, because the loan is tied in with the value of the property.

There are two types of loans: Closed End Home Equity Loans and Open End Home Equity Loans.

Closed End Loans:

"The borrower receives a lump sum at the time of the closing and cannot borrow further. The maximum amount of money that can be borrowed is determined by variables including credit history, income, and the appraised value of the collateral, among others. It is common to be able to borrow up to 100% of the appraised value of the home, less any liens, although there are lenders that will go above 100% when doing over-equity loans. However, state law governs in this area; for example, Texas (which for many years was the only state not to allow home equity loans) only allows borrowing up to 80% of equity.

Closed-end home equity loans generally have fixed rates and can be amortized for periods usually up to 15 years. Some home equity loans offer reduced amortization whereby at the end of the term, a balloon payment is due. These larger lump-sum payments can be avoided by paying above the minimum payment or refinancing the loan."(From Wikipedia: Home Equity Loans, 3/26/07)

Open End Loans:

"This is a revolving credit loan, also referred to as a home equity line of credit (HELOC), 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".(From Wikipedia: Home Equity Loans, 3/26/07)

Home Equity Loan Fees:

There are a number of fees that could apply to your loan: Appraisal fees, originator fees, title fees, stamp duties, arrangement fees, closing fees, early pay-off and other costs are often included in loans. Know your fees and you should be alright.

Home Equity Loan Links:

www.mortgageloan.com/home-equity-loans
www.bankrate.com/brm/hstep.asp
www.lendingtree.com
my.countrywide.com
www.eloan.com
www.gmacmortgage.com

The Definition of a Loan

A Loan is a type of debt.

Loans require two parties to meet and agree. The two parties are the borrower, and the lender. The borrower initially asks the lender for a specified amount of money. The lender agrees on the price, and lends the money to the borrower. It is then the borrower's job to pay back the lender in small or large increments.

Now, you may ask, what would be the point of giving away money only to receive it all back when the other person is finished with it? Well, the answer to that question is that the lender charges interest on the loan. The lender will say for example, I will give you $1000 dollars now, but I am going to charge you 3% interest.

This means that when the borrower pays back the lender, they will also have to give back another $30, due to the interest that the lender set. Therefore, both parties are happy because the borrower receives the money he needs and the lender gets back extra in return.

Abuses of the Loan system

There are some people who abuse the loan system. These type of people are called loan sharks. Loan sharks are lenders who will give a large amount of money to a borrower, knowing that the borrower will never be able to pay the loan back.

This puts the borrower in a bad position. The loan shark has complete control over the borrower now, and can do a multitude of illegal things to force them out of their money.

If you know you can't pay back a loan, don't ask for one!