What is a home equity loan?

It is a loan secured by the equity in your home. It means that a bank could lend you up to 75% or 80% of the equity in your home (the difference between the market value of your home and the outstanding balance on your home loan).

There are two types loans with mortgage guarantee: closed credit and open credit

1. With an open-ended home equity line of credit, you can borrow up to a predetermined credit limit in a revolving charge account.

2. With a closed-end home equity line of credit, you borrow a fixed amount for a set period of time. A closed equity home equity line of credit is the same as a second mortgage on a home.

What are the advantages of a home equity loan?

1. Interest charges on home equity loans up to $100,000 may be taken as an itemized deduction on federal income tax returns. (By contrast, interest payments on other types of consumer loans are not deductible.)

2. Home equity loans are generally available at lower interest rates than other consumer loans and repayment can be extended over a longer period.

What are the disadvantages of a home equity loan?

Borrowing against the equity in your home may encourage you to become a “borrower” rather than a “saver.”

If you default on a home equity loan, you could lose your home.

If your ATM card is stolen, a thief could withdraw the full balance of your home equity loan if the loan is accessible through your checking account.

Use this worksheet to help you shop for the best deal

Federal Reserve Board. Comparison shopping for a home equity loan.

This worksheet will help you compare:

• monthly payments,
• Annual Percentage Rate (APR),
• possible changes in the interest rate,
• the cost of points,
• loan application fees, appraisal or other fees,
• number of years to repay the loan,
• the possibility of a global payment,
• closing costs,
• penalty for late or missed payments, and
• cost of credit insurance

How can you protect yourself against losing your home when you use a home equity loan?

• Please read all articles carefully. It may be helpful to consult a lawyer to make sure you understand all the terms and conditions of the loan.
• Maintain records of account statements and payments.
• If credit insurance is included in the loan, request that the fee be waived. If you want credit insurance, shop around for the best rates.

What is a Senior Home Equity Conversion Mortgage (HECM)?

• This is also known as a reverse mortgage.
• It can be used by homeowners 62 and older to convert the equity in their home into a monthly stream of income or a line of credit that will be paid off when the home is no longer occupied.
• This loan is financed by a mortgage lender, bank, credit union, or savings and loan association.
• Consumers who wish to use this type of loan must receive education and counseling from a HUD-approved HECM counselor.
• Call 202-708-1112 for the nearest HUD office.

What are the requirements for a Senior Home Equity Conversion Mortgage (HECM)?

• Homeowners age 62 or older who have paid off their mortgages or have only a small amount left and currently live in the home.
• A HUD reverse mortgage does not require repayment as long as the home is the borrower’s primary residence.
• Lenders get their principal back, plus interest when the house is sold.
• In general, the more valuable the home, the older the owner, the lower the interest, and the more money they can borrow.
• Homeowners are charged an upfront insurance premium that is 2% of the maximum claim amount that can be borrowed plus an annual premium of 0.5%.

Resources

Federal Reserve Board. Comparison shopping for a home equity loan.

Federal Deposit Insurance Corporation. Putting your home on the loan line is risky business.

Federal Trade Commission. Home Equity Loans: Buyers Beware.

Housing and Urban Development (HUD). About Senior Reverse Mortgages – Section 255 – Home Equity Conversion Mortgages.

Checklist for Using a Home Equity Loan

1. Check out other possible sources before borrowing against your home equity.

2. Pay off the home equity loan as soon as possible.

3. Remember to include interest charges as expenses in your income tax calculation.