HOME EQUITY LOAN
A loan in which the owner of a house is allowed to borrow money on the
part of the house that is paid off or has value. For example, two years
ago you bought a house for $200,000. In that time you paid off $15,000.
The value of the house has risen $25,000. The equity is the added value
plus what you paid off, which is $40,000. You now qualify for a home equity
loan for $40,000. Another way to look at home equity loans is that they
are a loan with your home used as collateral
SECOND POSITION LIENS
Another name for a home equity loan.
SECOND TRUST DEED
Yet another name for a home equity loan.
SECOND MORTGAGE
Yup. You guessed it. Another name for a home equity loan.
CLOSED END HOME EQUITY LOAN
You get a lump sum at once. The amount you get depends on how much you
want and how much home equity you have. If you have really good credit,
you can get a home equity loan up to 100% of the home’s equity.
The more standard amount for a home equity loan is up to 80%. State laws
determine what the maximum amount is, so it varies by state.
OPEN END HOME EQUITY LOAN
Also called a “home equity line of credit”. Once approved,
the bank lets you borrow up to a certain amount against your property.
Based on your credit and the amount of home equity you have, the bank
establishes a maximum you can borrow. But you don’t have to take
it at once like a closed-end home equity loan. You can borrow what you
need when you need. People often use this type of home equity loan to
pay off credit card debt because the interest is tax-deductible. The minimum
monthly payment can be as low as what you owe in interest only. This interest
rate is usually based on the prime rate plus a couple points.
INTRODUCTORY RATE
This is a really good interest for the beginning of your home equity loan
that then expires a year or two into your home loan at a much higher rate.
This rate is usually really good which is why, if you have a good credit
and plan to pay back your home equity loan in a short period of time,
it should be considered.
FIXED INTEREST
An interest rate that never changes. With a home equity loan the advantage
is that you have the security that your home loan rate will never change.
The one disadvantage is that if rates go down, you have to go through
the hassle of getting a new home equity loan at a lower rate and all the
paperwork and hassle that goes with that.
MARKET VALUE
What your house would sell for it put on the market today. One way for
lenders to determine the maximum amount of your home equity loan.
HOME IMPROVEMENT LOANS
If you plan on fixing up your house with your home equity loan, than a
home improvement loan might be a better choice. These loans have different
requirements (some don’t even require equity). In other words, home
improvement loans might be easier to get for someone whose credit is not
perfect because it increases the value of the property the loan is against.
This makes this type of home loan far less risky for the bank.
BALLOON PAYMENT
Read this carefully. You could lose your home if you don’t understand
this. Here’s a typical scenario. You’re behind on your mortgage
and are facing foreclosure. To save your home you accept a refinance offer
from another lender which has lower monthly payments. Beware. The payments
might be less because you are only paying the interest owed each month.
This means that at the end of the term of the loan you have a balloon
payment – which could be the amount of the actual loan — you’ve
only been paying interest all these years. If you can’t make the
balloon payment, and you can’t get new financing, you could lose
your home. You can get more information on these types of loans from the
FTC