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When a borrower uses the equity in their home as collateral it is known as a home equity loan. Home equity loans are generally used to help finance expensive things such as medical bills, major home repairs, and college education. A lien is created through a home equity loan. A lien is a form of security interest over an item of property to secure a payment. The lien in a home equity loan is created against the borrower’s house, and reduces home equity.

Home equity loans can be first, second, or third position liens. They are generally second position liens. Good to excellent credit history is commonly required when trying to get a home equity loan. Reasonable loan-to-value and combined loan-to-value ratios are also something you may need to get a home equity loan.

The two forms of home equity loans are closed end and open end. Both of these types of home equity loans are most commonly second mortgages. Like a traditional mortgage, closed end and open end loans are secured against the value of property. In most cases home equity loans will have shorter terms compared to a first mortgage but in some cases they will have a longer term.

Closed End Loan

A closed end home equity loan is when the borrower receives a lump sum at the time of the closing and cannot borrow anymore. The factors that determine the maximum amount of money that can be borrowed include: appraised value of collateral, income, and credit history. It is not unusual that you will be able to borrow up to 100% of the appraised value of the home; in fact there are lenders that will go above 100% through an over-equity loan. Some states may, however, have a limit on the amount you can borrow.

Open End Loan

With an open end home equity loan a lender sets an initial limit to the credit line based on factors such as credit history and income. Not only that, but the borrower can choose when and how often they borrow against the equity in the property. A home equity line of credit, HELOC, is also known as an open end home equity loan. Just like the closed end home equity loan, it is possible to borrow up to 100% of the value of the home. The lowest possibly monthly payment you can have can be as low as the interest only. The interest rate is most commonly based on a prime rate plus a margin.

Appraisal fees are one of the many fees that can be associated with a home equity loan. The others include such things as: titles fees, stamp duties, closing fees, arrangement fees, originator fees, early pay-off, and other costs that may be included with a loan. Surveyor and conveyor or valuation fees are another type. It is possible that that the surveyor fee may be waived. The main way to reduce the cost of a surveyor fee is by getting your own licensed surveyor to inspect the property.

Home equity loans are normally used for paying off things that costs a large sum of money. You can choose a closed end or an open end home equity loan. You may be able to borrow up to 100% or over of the value of the home. It’s good to have a good credit history and a steady income if you want to borrow a large percent. Remember to check the loan you are thinking of choosing before you choose it to see what fees may come with it.

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