Basic of Home Equity Loans

Home Equity Loans - The Basics

Part of making smart decisions involving a home equity loan is knowing what the terms mean and what different types of loans exist. Many home owners find themselves overwhelmed when they start hearing things like equity and collateral or open end and close end loans. Getting a better sense of what these terms can mean as they pertain to your loan can be a helpful boost in understanding your loan options.

In simple terms, a home equity loan is a type of loan that borrows from the equity in your home by using the actual home as collateral. Obviously, you must be a home owner to qualify. What is equity? Equity is the home's value minus any liens it may have. Therefore when you borrow money using your home as collateral, you reduce the equity you have in your home.

It's a great option for home owners if they find themselves needing financial assistance for home repairs, college tuition or unexpected bills. However, be prepared to have your credit history thoroughly reviewed before getting approval from the lender. Having decent credit is a prerequisite although not always mandatory.

There are two main types of loans. The first is called a closed end loan. The word closed dictates that one lump sum is given via the loan and further monies cannot be received after the loan's closing. In some cases, the borrower can borrow up to 125% of the home's value but traditionally it's 80%.

The second type is called an open end loan. The word open gives this loan a revolving property. It is more of a line of credit where the borrower can choose when and how much money he/she would like to borrow. It is commonly called a Home Equity Line of Credit or HELOC.

Both loans come with a host of fees, so it's important to shop around before committing to a lender. You are not locked into getting a home equity loan through the same lender as your primary mortgage. Be sure to research the pros and cons of multiple companies as well as their available interest rates.

By Rick Swanson