Home Equity FAQ

What exactly is a home equity loan?
A home equity loan is a line of credit that uses your home as it's collateral. Collateral is an asset that works as a guarantee of repayment of the loan. If the loan cannot be repaved, the collateral (in this case your home) will be taken in exchange. This loan can provide a great way to finance home improvements, education or medical bills. Generally home equity loans are not used for day to day expenses, because a house is probably the largest asset the consumer owns. Home equity loans are commonly known as second mortgage, because they are taken against the value of the property exactly like a traditional home mortgage.

What are the types of home equity loans?
The two types of home equity loans are closed-end and open-end. In a closed-end home equity loan, the borrower receives an initial amount of money at the close of the home equity loan. Throughout the loan, he or she cannot borrow any more money on the loan. 

In an open-end home equity loan, the borrower is allowed to choose when to borrow against the equity in their house or property. The lender sets an initial limit to the credit line, but the borrower can take the money as it is needed.

What else should I know about home equity loans?
The Federal Truth in Lending Act also safeguards the borrower against changes to the terms of the account before the plan is opened. If a lender changes the terms of the loan before the account is opened, they are required to refund any fees the borrower has paid if they decide not to enter into the plan

What if I change my mind; can I cancel the transaction?
You'll have three days to cancel the transaction without reason. To cancel, you legally have to inform the lender in writing. Afterwards, all fees you've already paid must be returned. This, too, is guaranteed by the Federal Truth in Lending Act.

Besides the monthly payment, are there any other costs?
Much of that depends on the specifics of the plan, but you could potentially pay for many of the identical expenses you had with your first mortgage. These expenses include an application fee, title search, appraisal, attorneys' feeds and a percentage of the amount you borrow; these expenses may add a lot to the cost of you loan. Make sure to compare the total costs of the loan when deciding between an open or a closed home equity loan.

Additionally, it's legal for lender to charge continuing fees throughout the life of the loan; this may include an annual membership, participation, or transaction fee every time you borrow money.