The concept of a home equity loan in simple terms means the difference between the value of your home and the amount you owe for it. For most homeowners, their home is their greatest asset and is generally a treasure trove of cash. Statistics for 2005 show that the value of home equity in the United States was $ 11.3 trillion. The home ownership percentage in 2005 was 69% lower than the record 69.2% in 2004. Almost 124 million Americans own their own home. This fact makes the Home Equity Loan concept very important in today’s global mortgage market in the United States. Before going ahead with the concept of Home equity loans, it is very important to have a good understanding of the concept. The information collected below on the subject will definitely satisfy the need for information.
A home equity loan is a type of loan in which the borrower uses the equity in his home as collateral. These loans are sometimes useful for families to help finance major home repairs, medical bills, or a college education. A home equity loan creates a lien against the borrower’s home.
Home equity loans are generally second position liens (second deed of trust), although they can be kept in the first or, less frequently, in the third position. Most home equity loans require a 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.
Both are generally known as second mortgages, because they are insured against the value of the property, just like a traditional mortgage. Home equity loans and lines of credit are usually, but not always, shorter-term than first mortgages. In the United States, it is sometimes possible to deduct the interest from the home equity loan on personal income taxes.
Types of home equity loan concept
Closed capital mortgage loan
The borrower receives a lump sum at closing and cannot borrow more. The maximum amount of money that can be borrowed is determined by variables that include credit history, income and the value of the guarantee, among others. It’s common to be able to borrow up to 100% of the appraised value of the home, minus any lien, although there are lenders who will exceed 100% when making loans with excess capital. However, state law governs in this area; For example, Texas (which for many years was the only state that did not allow home equity loans) only allows loans of up to 80% of principal.
Closed home equity loans generally have fixed rates and can be amortized over periods of up to 15 years. Some home equity loans offer reduced amortization whereby at the end of the term, a balloon payment is due. These lump sum payments can be avoided by paying above the minimum payment or by refinancing the loan.