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How to Get a Home Equity Loan

What it is

In a home equity loan, the borrower uses his/her equity in a home as collateral, creating a lien against the borrower's house. There are two types of home equity loans — open-end and closed-end. An open-end home equity loan, or home equity line of credit (HELOC), is a revolving credit line from which the borrower can choose how much and when to borrow against his/her equity in the property. Much like a credit card, the lender will place a credit limit on this type of loan. A closed-end home equity loan is a lump sum loan that is borrowed at closing. These loans usually have a fixed-interest rate and can be amortized for a period of up to 30 years, though 5-, 10-, 15-, or 20-year periods are also common.

Usually, borrowers are only able to borrow up to 80% of the value of their home, though some lenders allow for a 100% value loan. Any home equity loan of more than 100% of the home's value is referred to as an over-equity loan.

Who it's for

A home equity loan is for any homeowner who needs help financing big purchases, such as college education, major home repairs, a new car, or medical bills. An open-end home equity loan, or home equity line of credit, is for individuals who want the flexibility to borrow against their home equity at any time to handle ongoing expenses. A closed-end home equity loan, on the other hand, is for individuals who want a huge sum of cash to handle a major one-time expense.

What you need to apply

For any type of home equity loan, you will need to be a homeowner with real estate equity. Your personal credit score will also be very important with this type of loan. Generally, home equity loans are only granted to individuals with very good or excellent credit.

Apply for a Home Equity Loan

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