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Home equity loans: the types, pros, and cons

By Trulia | Published: Oct 14, 2009 | 22 Comments

A home equity loan uses a borrowers "equity" in a home as collateral. The term generally refers to a loan taken out after the home has been owned for a while. The owner signs a mortgage, pledges his home as collateral, and walks away with a check. But technically, even a piggyback "second" loan, opened concurrently with a first for a new home purchase, is a home equity loan.

Then there are the Home Equity Lines of Credit, or HELOCs (pronounced just the way it looks). The difference is that you don't get a lump sum of cash. Instead you get a "checkbook" and the ability to "draw" on your home equity whenever you need cash. Naturally, the convenience comes with a cost—a higher interest rate. HELOCs are often referred to as "open-ended" loans while their fixed-amount counterparts (without the checkbook) are called "closed-ended."

Home equity loans were devised originally as a way to invest in home improvements, with the assumption that the money borrowed would be recovered eventually when the home was sold. But in recent years, home equity loans have financed everything from college educations to plastic surgeries.

Home equity loans and lines of credit may carry a shorter term than first mortgages. A 15-year term is common, as compared to a 30-year fixed loan. Many HELOCS are also ARMs, or Adjustable Rate Mortgages, with rates that float up and down along with some index such as the U.S. Prime Rate.

Home equity loans are "secured" by the underlying property, as opposed to credit cards which are a form of "unsecured" debt. Many homeowners have opted to refinance their higher-interest credit cards with home-equity loans or HELOCs. The lower rates and the tax deductibility of mortgage interest made the move a "no brainer," or so it seemed. But when the economy became weaker and home values dropped, their secured debt became a target for foreclosing lenders.

Conventional mortgages can be "non-recourse" loans in some states, secured only by the property itself. The lender may come after the home in a default situation, but the borrower is not personally liable. A home equity loan may be different and might be a "recourse loan" for which the borrower is personally liable. This distinction becomes important in foreclosure, because the borrower may remain personally liable for a recourse debt on a foreclosed property.

Comments

By Rosie,  Tue Nov 3 2009, 05:41
I have 2 HELOCS that the bank lent me including my first. I want refinace because at my age and the 2 HELOCS are interest only loans. I want to bundle all of these loans into one conventional so that I can begin paying off my house. Now that I have these loans my house is worth about $100,000 less than the house is worth. I'm 65 years old what can I do or should do. I used the money to remodel my home to make it handicap friendly so that I maybe able to stay in my home as long as I can and not have to go to a rest home. Please advise me what to do. I'm worried that some day I may not be able to make my house payment and that
bank of america would resposses my home. Please advice. Thank you
By D,  Tue Dec 8 2009, 20:56
Hello Rosie,

If your HELOC was used to purchase... I am seeing servicing lenders forgive the 2nd mortgage. If I understand correctly, that does not seem to be your case. It's great you remodeled it to be handicap friendly but that actually narrows the market for a potential home buyer if the servicing lender had to foreclose.

Look at this HUD link. It's the government approved agencies that can help you locate a provider to act as a liason if your lender turns down your request. These agencies do not charge to help you. http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2009/HUDNo.09-199

Crystal Beard
Ambient Home Lending
http://www.ambientlending.com
By Discount Lender,  Thu Feb 18 2010, 09:08
I would contact Bank of America and see if they can't do a loan modification to try and combine the loans and reduce payments. You don't want to wait until you are no longer able to afford this home as you will not be in a good position to negotiate. They may be able to reduce total loan amount & rate if you make your case. I know of several clients that could not refi due to low LTV that worked out an arrangement with their lender and were able to keep their homes. It is very important to keep the lender in the loop. You can do this on your own and do not need an attorney or another company that charges a fee. Call them and tell them of your predicament and ask if they have a "workout specialist".There is a government program that goes up to 105% on refis but will only do so if you have one loan and it is held by Fannie Mae or Freddie Mac. Above all, do not wait to see what B of A may be able to do to help. Good luck,
Rob Bush,
Managing Director, Crossroads Finance
Discount Mortgage http://www.crossroadsfinance.com
By Jmucci,  Thu Mar 25 2010, 12:14
Bank of America has just announced that they were going to start offering some people principal reductions, which it sounds like you may need.

Give them a call directly and see what they can do for you.

James Mucci - http://michiganmortgageadvisor.com/21-factors-reviewed-when-qualifying-for-a-michigan-refinance-or-purchase-mortgage-and-only-one-is-your-credit-score
By Peter Bright,  Mon May 3 2010, 20:08
If you need a home equity the best choices are limited. But there is some still to 90% with 740 credit scores
By Michael,  Thu Sep 16 2010, 23:36
It 's very good site for home quality ...But there is some still to 90% with 740 credits scores....
Michael
Best Loan Rates
By Thierry Abel,  Wed Mar 2 2011, 17:24
There are now HELOCs, "Stated/Stated" (no verification of income/assets), which is great for self employed homeowners, for up to $100,000 with maximum 75% LTV....
By stevecalis,  Thu Apr 7 2011, 04:07
We have not enough chooses if we need home equity with good credits. But we can find some with good credits scores.
By Kurdstan_2006,  Sun Jun 5 2011, 04:17
hey i would like to find me a small apartment in uppsala for more than 6 months ,,what can i do to find it quickly..for 15 June and more months
By Aram Arakelyan,  Sat Aug 13 2011, 08:25
Excellent article. There are some HELOCs out there still to 90% with 740 credits scores.

Aram Arakelyan
Broker
DRE #00935978
http://www.housevaluecheck.com
By Shawn Rosa,  Tue Dec 13 2011, 13:48
this recession has proven that banks may not let you tap into your home equity when the banks believe that home values will continue to fall.
By Markus Boyle,  Tue Dec 20 2011, 20:14
In response to Kurdstan_2006 comment, the mortgage balance can double on the lump sum in 5-7 years but the home also will appreciate. Not the way it was from 2001-2006 but it will continue to rise at a 2-4% pace per year. Most people that take out the lump sum usually do so because they are paying off a big mortgage. You should take into account all the future payments that you will not be making once you take out a reverse mortgage. That can be hundreds of thousands of dollars. A good site that told me all the truths about reverse mortgages was http://www.reversemortgagelendersdirect.com
By Sonia Lindsey,  Mon Feb 13 2012, 12:42
I am currently helping my parents find the best option for their mortgage. This article helped clarify a lot of overall details, but I also found http://hecmreversemortgages.com very useful, and they even have a Reverse Mortgage Calculator! Hope this is able to help others!
By bimanagementinc,  Thu Jun 21 2012, 21:51
I am a Canadian with 798 credit score and plan to buy $50000 condo in Las Vegas as my first investment in US real estate.

I wonder if I can have a mortgage from US bank for 30 yrs, 10% down payment?
If so, how about the interest rate? can I get Home Line of Credit?
THANKS from YING YU in Montreal, Canada (2012-06-22)
By Matie,  Wed Jul 18 2012, 02:31
There is a government program that goes up to 105% on refis but will only do so if you have one loan and it is held by Fannie Mae or Freddie Mac. Above all, do not wait to see what B of A may be able to do to help.

http://www.indexpost.com/
By y_gonsalez,  Thu Aug 23 2012, 12:18
how much is this house cash $$$$
By Zubin Smith,  Fri Nov 16 2012, 23:45
Home equity loans are definitely a good option but before using a home equity loan for any purpose, borrower should be aware of the pitfalls of these loans. Because the main drawback of these loan, is that borrower can lose their home also if they fail to meet the payment schedule required by the loan.
http://www.paydayau.com.au
By Kobe,  Thu Jul 25 2013, 03:42
Homeowner’s are simply making use of the equity in getting loan for either one of their personal needs. These home equity loans are much easier to be paid off as the interest rates are quite low and much more flexible in making easy monthly installments. Besides that http://www.kwikcash.co.uk would be a sound assistance for any queries regarding home equity loans.
By BILL103,  Sun Jan 5 2014, 21:59
I paid off my house 3 year ago now I would like to buy my wife part what kind of loan should i get? BILL
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By Daria Kolomiiets,  Fri May 23 2014, 15:23
Thanks!

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