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Free the equity in your home

• A home equity loan is a type of loan in which the borrower uses their equity - the difference between the estimated market value of the property and outstanding debts on it - as collateral.

• Because borrowers can provide lenders with a means of securing the loan, they can often obtain more money than would be possible through other lending channels, releasing money for major projects such as home renovation. And because the loan is generally taken out on the borrower’s primary residence, the interest they pay can, in certain circumstances, be tax deductible.

• However, given the fact that home equity loans are essentially second mortgages for substantial amounts that will greatly increase the debt burden on the borrower, lenders  will usually only provide them to people with good credit histories whose home value considerably surpasses their outstanding debts.

  Home-equity loans generally come in two varieties, open and closed:

• Open equity loans, sometimes referred to as home equity lines of credit, are revolving credit loans that allow the borrower to draw money whenever they need it against the equity in their property. The lender will establish a limit on the total amount that can be borrowed and will usually apply a flexible rate of interest. The duration of the loan can be as long as 30 years.

• Closed equity loans provide the borrower with a lump sum as soon as the contract is signed. As with open loans, there maximum amount that can be borrowed is determined not only by the equity built up in the property but also by the borrower’s personal credit history and other debts. In most cases, closed equity loans are paid off over a shorter period than open loans – the typical duration is 15 years – and interest is applied at either a fixed or flexible rate.

 

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