A home equity loan is a special type of loan wherein the borrower utilizes their home equity as collateral for the loan. These types of loans are usually used for larger projects and expenses, such as college tuition, medical expenses, or for home repair and improvement projects.
There are two different styles of home equity loans:
- Closed end: This is your traditional, one-time, lump sum payment loan
- Open end: This not so much an actual loan as it is more of a credit line that is based on the equity. Also called a home equity line of credit, or HELOC
Repayment of home equity loans is usually negotiated between the borrower and the lender. Closed end equity loan payments may be different than open end loans, which are more similar to credit card payments. Non-payment of home equity loans can often lead to a collections lawsuit, which may negatively affect the borrower in many ways.
While home equity loans can often help a person obtain various financial goals, they can be associated with various legal issues. These include:
- Overspending: Mismanaging funds through a home equity loan can create financial strain for a person; this is important to note, as the loan will effectively lower the home equity
- Lien: Drawing a home equity loan can lead to a lien being placed on the person’s home; in the event of a non-payment, the lender can often levy on the home in order to obtain payment (sometimes through a foreclosure proceeding)
- Financing a home: Home equity loans can be used to refinancing a home in lieu of a regular mortgage, but they can’t be used to initially purchase a home (for instance, when purchasing a second home)
Thus, home equity loans present some unique concerns in terms of a home loan, mainly because of the fact that home equity is being used as collateral. You should keep this in mind, as the home’s equity will be diminished by the loan. This could affect future transactions, such as a home sale, or if you are planning on transferring the home to an heir.
Home equity loans are very unique financial tools that are meant to be used in a certain way. You may wish to hire a real estate lawyer if you need advice or guidance if you have any questions or concerns regarding home equity loans. Your attorney can also provide legal representation in court for you if you need to file a home equity loan lawsuit.