Phoenix Urban Living News. Real Estate In Phoenix Arizona

Types of Home Equity Loans to Stay Away From

Also known as HEL, home equity loans, take their name from the borrower’s possibility to use the home equity for a collateral. The most common situations for the use of such loan options include medical bills, house repairs, college education and other situations of emergency when money is needed urgently. By home equity loans, the actual home equity is reduced and a lien is generated against the house in question.

People with a bad credit history will most certainly have difficulties in getting home equity loans, and, the combined loan-to-value ratios should be reasonable. Closed end and open end home equity loans represent the two categories identified for this kind of credit service; yet, lenders usually talk about these two types in terms of secondary mortgages because the guarantee for the borrowed value is the property itself. Let’s see what the two variants of home equity loan involve.

With closed end home equity loans, the borrower gets a certain sum of money and is forbidden from borrowing anything further. The amount in itself is determined by the value of the collateral, the income, the credit history and other personal data. While some lenders will provide a 100% amount of the appraised value of the house, in some states, legislation limits the borrowing up to 80% of the equity.

With closed end home equity loans, the paying-back period can extend up to fifteen years; the rates are normally fixed, with the mention that you can choose to refinance the loan if necessary. On the other hand, open end home equity loans are also called home equity lines of credit. The borrower has the freedom of choosing when and how frequently to borrow money against the value of the property, although there is a limitation to the credit imposed by the lender.

The disadvantage with open end home equity loans is that the interest rate is variable and you may have to pay the sum back over a thirty year period. Depending on the conditions in the financial agreement, and the lender’s policy, the due monthly payment can be as low as the interest rate only. Besides the regular pay-back scheme, there are all sorts of fees specific to home equity loans, and you need to take them into account very seriously too.

The possible fees due for home equity loans include, early pay-off, stamp duties, title fees, originator fees, appraisal fees, closing fees and so on. Make sure to get answers to all questions involving the fees, before the signing of the contract, and keep in mind the fact that there is no loan without some sort of fees applied to it. Moreover, don’t forget to inquire on the tax benefits available with home equity loans because most charged rates are deductible.