A home equity loan1

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.

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.


Closed end home equity loan
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 was, for

many years, the only state to not 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.


Open end home equity loan
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.


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.