subject: Home Equity Loans Normally Are Considered As The Second Position Liens [print this page] When a borrower pledges the equity of his home as collateral to get a loan, the loan is called home equity loan. Notwithstanding, the equity of a home is determined before a loan is given to the borrower. According to a standard definition, home equity is the market value of a homeowner's unencumbered interest in their real property i.e. the difference between the home's fair market value and the outstanding balance of all liens on the home.
Moreover, homes equity increases as the debtor makes payments against the mortgage balance. Additionally, the value of the home can also increase when there is real appreciation of property value in the market. Often called as real property value, home equity helps borrower meet various expenses including of major home repairs, medical bills or college education and such contingency requirements which may come upon him.
More often called HEL; home equity loans normally are considered as the second position liens or second trust deed. However, the same can be held even in first or, less commonly, third position. Most equity loan lenders require a borrower to furnish good to excellent credit history and reasonable loan-to-value and combined loan-to-value ratios amongst others. Moreover, there are two kinds of home equity loans e.g. closed end and open end equity loans.
Then there is a specific requirement of documents and fees which have to be fulfilled before getting a home equity loan. Fees such as Appraisal fees, Originator fees, Title fees, Stamp duties, Arrangement fees, Closing fees, Early pay-off fee, etc. are to be paid before going for a home equity loans. In addition to the fees mentioned before, surveyor and conveyor or valuation fees may also apply to loans but some may be waived.
It is remarkable to note that borrowers should understand the difference between home equity credit (HEC) and home equity line of credit (HELOC) and no ambiguity is maintained. Whereas a HELOC is a line of revolving credit with an adjustable interest rate, a home equity loan is a one time lump-sum loan. Additionally, home equity loan comes in fixed interest rate which may be high at the beginning and low at the end or vice-versa.
Home equity loans and lines of credit are usually a shorter term than first mortgages; however, the same is not a universal truth. HEC and HELOC both are usually referred to as second mortgages for the reason that they are secured against the value of the property the way a traditional mortgage is taken. As is evident, home equity lenders in the USA sometimes deduct home equity loan interest on one's personal income taxes.
As is quite evident, home equity loans are considered secured loans for the reason that the debt is secured against the collateral. In case the borrower fails to payback the loan amount the lender can either ask for the possession of the asset or can go for foreclosure of the home. Interestingly enough whereas a credit card loan is an unsecure loan, paying credit card debt using home equity essentially converts an unsecured debt to a secured debt.
