Home Equity Basics
Bankrate.com, Bankrate, Inc.
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Home Equity Credit Lines
Federal Trade Commission (FTC)
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Home Equity Loans: Borrowers Beware!
Federal Trade Commission (FTC)
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How Do You Shop For a HELOC?
Jack M. Guttentag, Ph.D.,
Mortgage Professor’s Web Site
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Second mortgage holder can foreclose
Don Taylor, Ph.D., CFA, CFP,
Ask Dr. Don,
Bankrate.com, Bankrate, Inc.
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What Is a HELOC?
Jack M. Guttentag, Ph.D.,
Mortgage Professor’s Web Site
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When Your Home Is On the Line: What You Should Know About Equity Lines of Credit
Board of Governors of the Federal Reserve System,
The Federal Reserve
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A home equity loan, often referred to as a home equity
credit line or home equity line of credit (HELOC), is a
type of loan which enables you to borrow money, based upon the value
of your home, using your home to secure the loan. To obtain a home
equity loan or home equity line of credit, you must pledge your
home to the lender, just as you do for a home mortgage. This
pledge is your assurance to the lender that you will repay the loan.
Essentially, the lender has become a partner with you in the ownership of
your home.
Once you have entered into a home equity loan or home equity line of credit agreement with a lender,
your home serves as collateral to protect the lender from
the possibility that you may not pay off your debt as promised. If
you fail to meet your obligation under the terms of the loan
agreement, the lender can seize your home and sell it to recover the
money you owe, a process known as
foreclosure.
A home equity lender or mortgage lender also has the right to periodically
inspect the condition of your home to insure that their investment is being
properly maintained so that it does not lose its value.
A home equity loan or home equity credit line is considered to be a
second mortgage when it is entered into while your primary
home equity mortgage is in place, borrowing upon the
equity or value not already borrowed upon by the primary home
equity mortgage.
Some home equity loans, such as home improvement loans or debt
consolidation loans, may stipulate how the loaned money is to be used
by the homeowner. Other types of home equity lines of credit come
without such restrictions. Conditions of this sort may be directly related
to the borrower’s credit history.
A standard home equity loan provides the entire loaned amount of money up
front (at the time the loan agreement is signed) minus fees
assessed by the lender, such as points, which represent an amount
based upon the amount of the loan, and fixed fees as well as
funds earmarked in the loan agreement to pay off existing debts.
You will then be required to make monthly payments, portions of which will
be allocated by the lender to both interest payments and repayment of
principal in accordance with the terms of your loan agreement.
A home equity line of credit permits a homeowner to borrow up to a maximum
amount on a gradual basis as the need arises. Such a line of credit
will often be presented by the lender in the form of a checking account or
credit card, thereby enabling easy access to the borrower. An
advantage of this form of home equity loan is that you can borrow
upon the line of credit on your schedule, thereby resulting in
smaller interest payments if you do not require the entire amount at once
or if your needs change. A disadvantage is that you may pay higher
up-front fees or recurring service charges for the flexibility such a
line of credit offers. For these reasons, it is extremely important
that you determine before entering into a home equity loan agreement
exactly what type of home equity loan best suits your needs.
IMPORTANT! Always ask what the
margin is on a home equity line of credit. A high margin,
which is rarely disclosed, can result in a substantially higher interest
rate than you were expecting! Read
How Do You Shop For a HELOC? by Dr. Jack
Guttentag.
Authored by Kenneth L. Anderson.
Original article published 22 February 2006.
Follow links to the right to learn more about home equity loans, home equity lines of credit, home equity loan rates and second mortgages.
At the left margin, Related Links address topics of interest
pertaining to personal finance and money-saving resources. View the
Personal Finance SiteMap
for a complete list of personal finance and financial services topics.
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