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A home equity loan rate allows a
borrower to use the equity in his home as collateral. Borrowers often take
out home equity loans in order to remodel or repair their homes, pay
medical bills or finance college educations. When a borrower takes out a home equity
loan, a lien is placed on his property. The majority of home equity loans
are second position liens, which means that they are second in line behind
a first mortgage. However, if there is no first mortgage on the property,
the equity loan takes the first lien position. Although rare, it is
possible for an equity loan to be a third position lien. In order for a borrower to take out a home
equity loan, he often has to have a good credit history, a reasonable
loan-to-value ratio and meet lending requirements. Home equity loans are
available as closed ended and open ended. Home equity loans are often referred to as
second mortgage. They function in the same manner as a traditional
mortgage, but with a shorter term. In most cases, the borrower is able to
deduct the home equity loan interest on his federal income tax return.
Home Equity Loan Rate
A closed-end home equity loan is one in which the borrower receives a lump sum of money at the closing with a fixed interest rate, repayment term and monthly payment. The closed-end loan functions just like a traditional loan. The amount of money that is borrowed is determined by various factors, including credit history, income, property value and existing mortgages on the property. Many lenders will loan up to 100% of the appraised property value of the home; however, over-equity loans will grant over 100% of the home's value.
Closed-end loans typically have fixed rates. The repayment term can be as short as three years or as long as 15 years. Many offer reduced amortization with a balloon payment due at the end of the term. The balloon payment can be avoided by paying more than the minimum payment or refinancing the loan before the term is up.
The open-end home equity loan
An open-end home equity loan is often referred to as a home equity line of credit, or HELOC. This is a revolving credit loan, similar to a credit card, which allows the borrower to choose when and how often to borrow against the home's equity. The lender sets a credit limit to the loan which is based on the borrower's credit history, income, property value and existing mortgages on the property. The borrower can often borrow up to 100% of the property's value. Lines of credit are available in 30-year terms. They usually are subject to variable interest rates. Depending on the type of loan, the repayment amount can vary from a set percentage of the balance owed to an interest-only monthly payment.
The interest rate on a HELOC is usually
lower than the rate of other types of revolving credit, such as credit
cards. This is due to the use of a property as collateral, which reduces
the lender's risk. The interest rate is typically based on a specific
prime rate plus a pre-set margin.
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