Ten Facts you need to know about a Home Equity Loan (HEL)

1. A Home Equity Loan (HEL) is a type of loan in which the borrower uses the equity in their home as collateral.

2. Major home repairs are often financed in this way but these loans can be used for anything from children's education to world cruises.

3. A lien is created on the property and reduces the actual home equity. (the house is now worth X minus the equity loan).

( A Lien is a form of security interest granted over an item of property to secure payment of a debt or some other obligation. The owner of the property who grants the lien is a lienor and the person who has the benefit of the lien is the lienee.)

4. Home Equity Loans are usually second liens (second trust deed) although sometimes they are first or even third.

5. You will also need a very good credit history , a reasonable loan-to-value and combined loan-to-value ratios.

6. Home Equity Loans come in two types, Closed End and Open End.

a} A Closed End Home Equity Loan.
The borrower receives a lump sum at the time of the closing and cannot borrow further on the property. The amount of, and whether you will be able to get one at all depends on various factors eg. credit history, income and the apraised value of the collaterel among other things. Often you can borrow up to 100% of the appraised value of the home less any liens (some lenders will go above 100% when doing Over-Equity Loans)
Closed End Home Equity Loans generally have fixed rates and can be amortized for various periods although some home equity loans off reduced amortization whereby at the end of the term a baloon payment is due. These larger lump sum payments can be avoided by paying above the minimum payment or refinancing the loan.

b} An Open End Home Equity Loan
The borrower in an open end home equity loan can choose when and how often to borrow against the equity in the property. The lender sets an initial limit to the credit with criteria very similar to those for a closed end loan. It is sometimes possible to borrow 100% of the value of the home less any liens. Variable interest with credit of up to 30 years. It is possible to pay minimum monthly payments consisting of interest only. Usually the interest rate is based on the prime rate plus a margin.

7. Both Closed End and Open End loans are usually referred to as Second Mortgages because they are secured against the value of the property (as a traditional mortgage).

8. Home Equity Loans are usually, but not always, for a shorter term than first mortgages.

9. There is a difference between an HEL and an HELOC. (the first is a Home Equity Loan and the second is a Home Equity Line of Credit)
HEL's are paid as one lump sum whereas a HELOC is a revolving line of credit with an adjustable interest rate.

10. Home Equity Loan Fees

Appraisal Fees/ Originator Fees/ Title Fees/ Stamp Duty/ Arrangement Fees/ Closing Fees / are the fees that you may well have to pay Early Pay-Off and other costs are often included in loans. Surveyor fees and similar may also apply. (you can reduce these by providing your own licenced surveyor). The title charges in secondary mortgages are often fees for renewing the title information.

Make sure you have read and understand all the charges before signing on the dotted line.