home equity loan

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.
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.
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.



There is a specific difference between a home equity loan and a Home Equity Line of Credit (HELOC). A HELOC is a line of revolving credit with an adjustable interest rate whereas a home equity loan is a one time lump-sum loan, often with a fixed interest rate.

This is a revolving credit loan, also referred to as a home equity line of credit, 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.

When considering a loan, the borrower should be familiar with the terms recourse and nonrecourse loan, secured and unsecured debt, and dischargeable and non-dischargeable debt.

US traditional mortgages are usually non recourse loans. "Nonrecourse debt or a nonrecourse loan is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable."[1] A US home equity loan may be a recourse loan for which the borrower is personally liable. This distinction becomes important in foreclosure since the borrower may remain personally liable for a recourse debt on a foreclosed property.

Home equity loans are secured loans. "The debt is thus secured against the collateral — in the event that the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to satisfy the debt by regaining the amount originally lent to the borrower."[2] Credit card debt is an unsecured debt such that no asset has been pledged as collateral for the loan.
Using a home equity loan to pay off credit card debt essentially converts an unsecured debt to a secured debt.

Homework

Do Your Homework
Contact several lenders—and be very careful about
dealing with a lender who just appears at your door,
calls you, or sends you mail.
Ask friends and family
for recommendations of lenders. Talk with banks,
savings and loans, credit unions, and other lenders. If
you choose to use a mortgage broker, remember they
arrange loans but most do not lend directly. Compare
their offers with those of other direct lenders.
Be wary of home repair contractors that offer to
arrange fi nancing. You should still talk with other lenders
to make sure you get the best deal. You may want
to have the loan proceeds sent directly to you, not the
contractor.
Comparison shop. Comparing loan plans can help
you get a better deal. Whether you begin your shopping
by reading ads in your local newspapers, searching
on the Internet, or looking in the phone book, ask
lenders to explain the best loan plans they have for
you. Beware of loan terms and conditions that may
mean higher costs for you. Get answers to these
questions:
Interest Rate and Payments
What are the monthly payments? Ask yourself if
you can afford them.

What is the annual percentage rate (APR) on the
loan?
The APR is the cost of credit, expressed as
a yearly rate.
You can use the APR to compare one
loan with another.
Will the interest rate change during the life of the
loan? If so, when, how often, and by how much?
Interest Rate and Payments