How Do Home Equity Loans Work

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Many home owners will sign onto different home equity loans each day without fully understanding what home equity loans are, and how they work.

In this article, I’ll attempt to explain how home equity loans work, and why home equity loans aren’t right for everyone.

There are two types of home equity loans – closed end home equity loans, and open end home equity loans.

Closed end home equity loans is where the borrower gets a lump sum of money at the time of closing, and they can’t borrow any further. The maximum amount depends on your credit history, the value of your home, your income, and other important factors. Many can borrow up to 100% of the value of their home, which is determined at the time of appraisal. Some lenders allow you to take out over-equity loans, which are basically home equity loans that allow you to borrow more than the value of your home.

Some states forbid this, however – Texas, which for some time didn’t even allow home equity loans, will only let you borrow up to 80% of the equity on your home.

Generally, closed-end home equity loans have fixed rates, and can be amortized for up to 15 years. Some times, at the end of home equity loans that have been amortized, a balloon payment is due. This can be easily avoided by paying extra each month, or refinancing the loan.

Open end home equity loans are often referred to as home equity lines of credit, which is basically a revolving credit loan. The borrower can choose when, and how often, or borrow against the property. The lender sets the initial limit to the credit line, with criteria very much similar to closed end home equity loans. Sometimes you can borrow up to 100% of the value of your home, and these lines of credit are available for up to 30 years.

The minimum monthly payment with these types of home equity loans are usually very low.