Home Equity LoanHome equity loans are most commonly second position liens, also known as second trust deeds, 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 additional loan-to-value ratios. Home equity loans come in two types, closed end and open end. Both are usually referred to as second mortgages, because they are secured against the existing value of the property, just like a traditional second mortgage loan. Home equity loans and lines of credit are usually, but not always, for a shorter term than first mortgages. In the U.S., it is sometimes possible to deduct home equity loan interest on one's personal income taxes. There is a specific difference between a home equity loan and a Home Equity Line of Credit. A home equiy line of credit is a line of revolving credit with an adjustable interest rate while a home equity loan is a one time lump-sum loan, often with a fixed interest rate. The borrower receives a fixed amount at the time of the closing and cannot borrow further. The maximum amount of money that can be borrowed is determined by variables including credit history, income, and the appraised value of their collateral, among others. It is often common to be able to borrow up to 100% of the appraised value of one's home, less any liens, although there are lenders that will go above 100% when doing so-called over-equity loans. Nevertheless, state law governs in this area; for example, Texas (which was, for many years, the only state to not allow home equity loans) only allows borrowing up to 80% of a home's equity. Closed-end home equity loans generally have fixed interest rates and can be amortized for periods up to about 15 years. Some home equity loans offer reduced amortization whereby at the end of the term, a balloon payment is due. These larger lump-sum payments can be avoided by paying above the minimum payment or refinancing the loan. |
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