Lenders are more than willing to extend a home equity financing loan than any other type of loan because they consider a home financing loan to be a safer option that most other types of loans.
First, a home financing loan, be it a home equity loan or a home equity line of credit, it is based on the equity of a house. Lenders know that the house will always be there, so they know they can collect the collateral should the owner default. Second, because of the possibility of losing their home should they default, homeowners are more likely to make the regular payments.
Home equity loan and a home equity line of credit – What are these?
For those with poor to bad credit, it may be helpful to first understand what, exactly, is a home equity loan and a home equity line of credit.
Home equity loan
Home equity loans (also known as a second mortgage) are types of loans in which borrower of the money uses their home value (the equity) as collateral should they default. This develops a claim on property against the owner’s home and can reduce the actual equity of the home in the process. Most home equity loans are fixed at approximately 80 percent of the value of the home. The borrower receives the funds in full at the closing of the loan arrangement and must repay the loan over a pre-determined period with interest (usually, but not in all cases at a fixed rate). If the loan is repaid in full within the pre-determined period, the lender releases the mortgage back to the owner. If the owner defaults, the lender can foreclose on the mortgage and take the home to fulfill the debt. For this reason, lenders only extend home equity loans to those with excellent to good credit history.
Home equity loans are extended in two ways: open end and closed end.
These both types of home equity loans are mostly associated with second mortgages and are secured against the property’s worth, similar to traditional mortgages. These type of lines of credit and loans are in most cases made for a shorter duration. In the US, there is even a possibility to deduct interest of a home equity loan based on one’s income taxes.
Home equity line of credit
With a home equity line of credit, the borrower receives the amount of equity of their home in the form of credit and, indeed, the process works like a credit card. The lender determines the value (or equity) of your home and balances that against your past credit payment history. Interest rates on the home equity line of credit are usually variable and follow the Prime Interest Rate. Once the amount is determined, the homeowner can access the funds (up to the equity limit) whenever necessary, either by using their credit card which is tied to the account or by writing a check, also connected to the account. The homeowner with a home equity line of credit will have to make monthly payments that may change depending on the amount you owe.
Open period and a repayment period
With a home equity line of credit, there is usually an “open” period and a “repayment” period. In the open period, you have access to the funds and can make withdrawals at any time. In the repayment period, as you might imagine, access to the money is closed but you must still make payments (with the minimum payment usually consisting of the interest). In addition, a lender may set a starting limit on the amount that can be taken out of a home equity line of credit or may require you to withdraw a minimum amount each time you take out money or keep an outstanding minimum amount. It is also possible for the homeowner to borrow up to hundred percent of the equity and the credits can remain open up to thirty years.
Both a home equity loan and a home equity line of credit feature tax-deductible interest and usually a better interest rate than an unsecured personal loan because your home stands as collateral. They are considered recourse loans and secured debt in that the borrowing is personally liable for the debt and the home can be used to conciliate the debt.