Home Equity Loan

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 for families to help finance major home repairs, medical bills or college education. A home equity loan creates a lien against the borrower’s house.

Home equity loans are most commonly second position liens (second trust deed), although they can be held in first 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. Home equity loans come in two types, closed end and open end.

Both are usually referred to as second mortgages, because they are secured against the value of the property, just like a traditional mortgage. Home equity loans and lines of credit are usually, but not always, for a shorter term than first mortgages. In the United States, it is sometimes possible to deduct home equity loan interest on one’s personal income taxes.

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 100% of the appraised value of the home, less any liens, although there are lenders that will go above 100% when doing over-equity loans. However, state law governs in this area; for example, Texas (which was, for many years, the only state to not allow home equity loans) only allows borrowing up to 80% of equity.

Closed-end home equity loans generally have fixed rates and can be amortized for periods usually up to 15 years. Some home equity loans offer reduced amortization whereby at the end of the term, a balloon payment is due. These larger lump-sum payments can be avoided by paying above the minimum payment or refinancing the loan.

Open end home equity loan

This is a revolving credit loan, also referred to as a home equity line of credit (HELOC), 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 100% 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. The minimum monthly payment can be as low as only the interest that is due.

Typically, the interest rate is based on the Prime rate plus a margin.

Applying for a Home Equity Line of Credit

Here’s how the Quicken Loans home equity line of credit application process works:

• First, we ask for some basic information about you, your income and the property. Your Social Security number is necessary to pull a copy of your credit report. There’s generally less paperwork involved, so closing on a home equity line of credit is quicker than a standard first mortgage.
• Quicken Loans can approve you right over the phone, schedule your closing online, and close your home equity line of credit in as little as 7-10 days.
• Closing fees are generally required; however, Quicken Loans has eliminated most closing fees. In order to close your loan, you will likely have to pay local city, county and state recording fees and taxes. Depending on the state you live in, you may also be charged attorney fees. These closing fees can either be deducted from your line of credit or you can bring a cashier’s check to pay for them at closing.

How Does a Home Equity Line of Credit Work?

A home equity line of credit has several unique characteristics. Here is a quick overview:

• During the initial years of the loan, you are usually only required to make interest-only payments and you only make payments if and when you draw money from your account.
• After the initial years of the loan, the full balance is amortized and paid off over remaining years. An initial minimum draw (taking the money in cash) is sometimes required at closing. However, Quicken Loans does not require an initial minimum draw on HELOCs.
• Like any standard loan, the interest rate and annual percentage rate (APR) are calculated based your credit score and the combined loan-to-value ratio (CLTV). Generally, the lower CLTV ratio you have, the lower your interest rate and APR will be.
• Your interest rate adjusts as the result of an index plus a margin . The index, which can change, is the Prime Rate as published in the Wall Street Journal at the time of the adjustment period. The margin, which can not change, will be determined at the time of your application.

Benefits of a Home Equity Line of Credit

What Is a Home Equity Line of Credit?

A home equity line of credit (HELOC) is a type of second mortgage. The way a HELOC works is very similar to the way a credit card works. Your home equity is used as the collateral for the loan and you receive a line of credit from which you can draw money.

Benefits of a Home Equity Line of Credit

Using your home equity line of credit for home improvements, consolidating your high-interest debts, or keeping a “rainy day” fund, is a better financial alternative than using your credit cards. Here are the top 4 home equity line of credit benefits:

• You get a lower interest rate than you would with your credit cards. That means you pay less interest over the life of the loan.
• You get tax advantages that are not available with credit cards. With a home equity line of credit, the interest  is usually tax-deductible.* Interest on credit cards is not tax-deductible.
• You get flexibility in your payment options. Lenders like Quicken Loans offer interest-only options  to help make your payments more flexible. With an interest-only home equity line of credit, you have the option to pay only the interest for a pre-determined amount of time or pay interest plus as much or as little principal as you want.
• You get much larger credit limits. Quicken Loans offers home equity lines of credit up to $500,000. This is a great option to have when making a large purchase, such as remodeling your kitchen or adding an addition to your home.