Home Equity Loan
Home equity loan refers to a loan in which the borrower utilizes the equity or ownership in his/her home as a collateral. Borrowers generally take out home equity loans to fund significant expenses like home repairs, medical bills, or college education.
There are two types of home equity loans, home equity term, which has a fixed term, and home equity line of credit, which is variable.
Borrowers, who wish to take a home equity loan, in most cases are required to have excellent credit history and reasonable loan-to-value and combined loan-to-value rations.
Home equity loans could be either closed endHET and open endHELOC. Both, closed endHET and open endHELOC are generally referred to as second mortgages, since borrowers secure them against the value of a property.
In most cases, home equity loans and lines of credit have a shorter-term than first mortgages. Although borrowers can use home equity loan as a main mortgage, they cannot buy a house using a home equity loan. Home equity loans are generally used for refinancing purposes.
The interest paid on home equity loan can be deducted from personal income taxes in most cases in the United States. Tax rules differ from country to country, however. In Australia, for example, borrowers can deduct interest payment on home equity loans from income taxes if the proceeds of the loan are utilized for investment purposes.
The crucial difference between a home equity loan and a home equity line of credit (HELOC) is that HELOC is a line of revolving credit, while home equity loan is a one-time lump-sum loan. Also, HELOC generally have an adjustable interest rate. On the other hand, home equity loan, in most cases carry a fixed interest rate.
A number of fees are applicable on home equity loans, including Appraisal fees, Originator fees, Title fees, Stamp duties, Arrangement fees, Closing fees, and Early pay-off fee.
A surveyor and conveyor or valuation fees can be also applied on home equity loans.