Ok…simple question…just wanna make sure I have it right. A mortgage is collateralized by the residential real estate that it is used to purchase. An HEL (Home Equity Loan) is also backed by residential property. Is my understanding correct that the difference between the two is the fact that in a mortgage the borrower doesn’t actually own the property, the loan is taken out TO eventually own the property vs. in a HEL, the borrower takes out a loan using residential property that he actually owns as collateral…??
You are correct. Let’s say you have a mortgage that you have paid down $25000 of the principal on. A HEL loan would be a loan using the 25k as collateral.
A (house)=L(mortgage) + E(difference between house value and mortgage amount) A HEL is a loan based on your E in your house.
right…that’s the same as what budfox said right… thanks a ton fellas… makes sense now
The only thing I would add to budfox is that the HEL is not just based on the principal that you have paid down on your mortgage, but also the appreciation in the house. That is why I put the A=L+E.
Not my area of expertise, but my impression has always been that with a mortgage the borrower owns his home, but grants a first priority lean against his home as security for the loan (mortgage). The bank does not own the home. a home equity loan is just a second lien on the same asset.
Super, I think you are right (not sure if this is different in different countries). I was just trying to convey the concept using our familiar A=L+E to show how the potential value of the HEL could be derived.
Super …don’t think that’s entirely correct…the cfai and schweser both say…that although there was a time where the HEL were becoming second and third lien - most of them now are first lien loans… and in a mortgage - the borrower doesn’t own the home yet…
CFAI text - Vol 5, Page 247 - first paragraph…
since you buy the house first and then take a hel I’d rather see it the way super said it
I guess we have to learn what CFAI text wants us to learn, but Super is correct with respect to who owns the home. If you look at the deed to your home (in the US), it shows the homeowner as the individual(s), trust, or other, but not the bank. As far as first or second lien, CFAI/Schweser is attempting to state a fact that homeowners that have paid off their mortgages are now taking out home equity loans. I would be curious to see research (as there have been significant piggyback loans in the form of HELOCs in recent years - simple obvervation).
ok…i see what you all are saying now… thanks again everyone - super, florinpop and planner !
mumukada Wrote: ------------------------------------------------------- > Super …don’t think that’s entirely correct…the > cfai and schweser both say…that although there > was a time where the HEL were becoming second and > third lien - most of them now are first lien > loans… > People are starting to use the term HEL very broadly, in some cases referring to any loan secured in some fashion by residential real estate. But in any case where there is an underlying mortgage and then you get another HEL or HELOC (home equity line of credit) on top of it, by definition that second loan is a second lien. The original lender does not come back and grant parri passu status.