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Home Equity Loans

General

A home equity loan is sometimes abbreviated HEL. A HELOC is a Home Equity Line Of Credit, and is an adjustable equity loan adjusting based on Prime Rate plus a margin. A HELOAN is a Home Equity Loan, and is a fixed rate. A home equity loan is a type of loan in which the borrower uses the equity in their home as collateral. These loans are sometimes useful to help finance major home repairs, medical bills or college education. A home equity loan creates a lien against the borrower's house, and reduces actual home equity.

Home equity loans are most commonly second position liens (second trust deed), although they can be held in first if there is no other mortgage on the property or, less commonly, third position. Most home equity loans require good to excellent credit history, and reasonable loan-to-value and combined loan-to-value ratios. The standard Combined Loan-To-Value is 90% maximum. This means you can owe no more than 90% of the recent appraised value, between the existing 1st trust mortgage and your new home equity loan.

Home equity loans and lines of credit are usually, but not always, for a shorter term than first mortgages. It is sometimes possible to deduct home equity loan interest on one's personal income taxes.

HELOAN (also called a "Closed End home equity loan")

The borrower receives a lump sum 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 the collateral, among others. It is common to be able to borrow up to 90% of the appraised value of the home, less any liens.

Closed-end home equity loans generally have fixed rates and can be amortized for periods usually up to 15 years. Some home equity loans are called 30/15, where the loan is amortized over 30 years, but has a balloon payment due in 15 years. The lump-sum balloon payment can be avoided or reduced by paying above the minimum payment or refinancing the loan at a later date before the balloon is due.

HELOC (also called a "Open End home equity loan")

This is a revolving credit loan, where the borrower can choose when and how often to borrow against the equity in the property, with the lender setting an initial limit to the credit line based on criteria similar to those used for closed-end loans. Like the closed-end loan, it may be possible to borrow up to 90% of the value of a home, less any liens. These lines of credit are available up to 30 years, usually at a variable interest rate, which is usually based on Prime Rate plus a margin. The minimum monthly payment can be as low as only the interest that is due (also called an "Interest Only" loan).