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Borrowers like home equity loans because they have the ability to borrow the money with relatively little cost up front and far lower interest than they would normally pay for unsecured consumer credit. The access to such credit may prove extremely valuable. Credit is the great wonder of American society. You can be born on credit, live on credit and probably die on credit.
Home equity loans are hybrid loan products that take features both from traditional mortgages and consumer credit packages. These loans allow the borrower to use the difference between what their mortgage balance is and a percentage of their home's value, usually 70-80 percent. They can use the money for anything they want. A home equity loan is a flexible, low-interest way to pay for major expenses. Sometimes, it is even tax deductible.
There are federal government issued rules that significantly impact home equity loans. One rule that benefits borrowers is the elimination of the use of internal indexes. This means that a lender cannot raise its prime rate, thereby causing home equity costs to go up. Another provision is that lenders cannot reserve the right to change fixed rates. This means that the rate will stay the same during the term of the loan.
Some of these special rules do make home equity loans less certain. For instance, if the value of the principal residence used to secure a loan is "significantly less than the original appraisal value," then lenders can freeze withdrawals. Secondly, if the lender has any reason to believe that the consumer will be unable to comply with the repayment requirements of the account due to a material change in their financial circumstances, lenders can stop further home equity withdrawals.
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