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A home equity loan is a loan in which the borrower uses the equity in their home as collateral. Medical bills, major home repairs, and college education are examples of what home equity loans can help finance. A lien is a type of security interest over an item of property to secure a payment. Why do you need to know this? A lien is created against the borrower’s house, and actually home equity is reduced through a home equity loan.

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.

Closed end and open end are the two forms of home equity loans. Generally the both of these are referred to as second mortgages. The reason is because they are secured against the value of the property, like a traditional mortgage. Home equity loans may have a longer term than first mortgages but generally they have shorter terms.

Closed End Loan

Receiving a lump sum at the time of the closing and being unable to borrow more money is done through a closed end home equity loan. There are some things that can affect how much money you may borrow. Things that affect that are credit history, income, and appraised value of collateral. Generally you will be able to borrow up to 100% of the appraised value of the home. It is even possible that a lender will let you borrow over 100% through an over-equity loan.

Open End Loan

A borrower chooses when and how often they borrow against the equity in the property through an open end home equity loan. Also the lender sets an initial limit to the credit line bases on factors such as income and credit history. Another name for an open end home equity loan is a home equity line of credit. It is possible that you can borrow up to 100% of the value of the home, much like with a closed end loan. Your monthly payment can be as low as the interest. The interest rate is normally 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.