Home Equity Loans

The article is provided by Kelly Chung at YMYWDIRECT.COM

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A home equity loan (HEL) is a loan backed by residential property. At one time, the loan was typically a second lien on a property that was already pledged to secure a first lien. In some cases, the lien was third lien. A home equity loan is often a first lien on property where the borrower has either an impaired credit history and/or the payment-to-income ratio is too high for the loan to qualify as a conforming loan for securitization by Ginnie Mae, Fannie Mae, or Freddie Mac. Typically, the borrower used a home equity loan to consolidate consumer debt using the current home as collateral rather than to obtain funds to purchase a new home.

Home equity loans can be either closed end or open end. A closed-end HEL is structured the same way as a fully amortizing residential mortgage loan. It has a fixed maturity and the payments are structured to fully amortize the loan by the maturity date. With an open-end HEL, the homeowner is given a credit line and can write checks or use a credit card for up to the amount of the credit line. The amount of the credit line depends on the amount of the equity the borrower has in the property. Because home equity loan securitizations are closed-end HELs.