What is a Home Equity Loan?

What is a Home Equity Loan?

A Home Equity Loan is a type of loan where the borrower uses their available equity in their property as collateral for a loan, normally in a smaller amount to be used for home repairs, medical bills, or sudden emergencies. This creates a lien against the property until the loan is paid in full.

Most home equity loans require good to excellent credit history, and a loan to value ratio that is seen as worth the risk to the lender. There are two types of home equity: closed end, which is referred to as simply a home equity loan, and an open end, also known as a home equity line of credit. Both can be referred to as a second mortgage for the reason that they are secured against the value of the property in question, much like a mortgage.

There is a significant difference between a home equity loan and a home equity line of credit, or an open or closed end loan as we discovered earlier. A home equity line of credit is a line of revolving credit with an adjustable interest rate . A home equity loan is a one time lump sum loan often times with a fixed interest rate. With a home equity line of credit a borrower can choose when and how often to borrow against the equity of the property, as well as when and how to pay it back. In both a close and open loan it may be possible to borrow up to the full equity of the property.

There are a few small fees that can apply to home equity loans:

  • Appraisal fees
  • Originator fees
  • Title fees
  • Stamp duties
  • Arrangement fees
  • Closing fees
  • Early pay off fees

There are other fees such as surveyor, and conveyer or valuation fees may also apply but can be waived.