Home equity loans, or second mortgages, are loans borrowed against the equity value of your home. If the home is sold and a warranty deed is signed, the funds from the buyer are first used to pay off any outstanding mortgage loans. If any money remains, the sellers realize a profit on the sale. The equity loan then would be satisfied and discharged by the original lender.
The equity of a home is the difference between what is owed on any mortgage loans and what the property is worth on the market. Generally, equity builds over the years as homeowners pay down the mortgage loan and the property appreciates in value. For example, a home was purchased for $200,000 with a $10,000 down payment. Over the course of 10 years, the mortgage was paid down by $50,000 and the property had appreciated in value by $5,000; the equity value is then $65,000. The equity can be borrowed against through a home equity loan or home equity line of credit. Much like a regular mortgage, this loan secures the property as collateral.
Loan vs. Line of Credit
There are two ways to borrow against a home's equity. The first is a traditional home equity loan. This option provides the homeowner with one-time payment, or lump sum. The lender is repaid via monthly installments for a set period of time. A home equity line of credit, HELOC, acts more like a credit card than a loan. The homeowner uses money from the equity as needed, and then repays it monthly. As payments are made, the money becomes available for use again. Most lenders set a limit as to how much can be drawn at one time. The HELOC is a revolving account.
Warranty deeds are used to transfer the ownership of a home when it is sold. The seller signs the warranty deed in the presence of a notary public granting his ownership rights to the buyers. The warranty deed includes a complete legal description of the property in question in addition to the full names of the sellers (grantors) and buyers (grantees). Legally, a warranty deed provides that the grantor holds the property title free and clear of any liens on the property from lenders, taxing authorities or other individuals. A title insurance company verifies this information through title searches and often provides a policy to the grantees.
If a homeowner decides to sell his property that is subject to an outstanding mortgage loan and equity loan, the buyer's mortgage company pays off the seller's loans first. This transaction is generally conducted by the title insurance company or settlement agency acting on behalf of the mortgage companies. The seller and buyer do not deal with the exchange of money. The warranty deed is then signed in confidence. The closing is scheduled via the buyer's real estate agent and the transaction is complete. If the property sales for more than both mortgage loans, the seller receives the difference as profit.
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