Home Equity Loan
Get a time-tested way to get cash fast!
By tapping into your home equity you get quick access to cash to fulfill any financial requirements.
Owning a property gives you plenty of benefits and borrowing against it in the form of a home equity loan is one of the most significant benefits you can get. You can use the money in the way you want; that’s why people prefer it so often.
But what is a home equality loans exactly? How does it work and how do you qualify? Get all your answers here!
Home Equity Loans!
The loan that you get against the equity on a home property is known as a home equity loan, home equity installment loan, or second mortgage. You can get this loan approved for any purpose. For either non-residential or residential. To calculate the loan amount, the property’s current market value is determined.
In simple terms, it’s a second mortgage that you take to be used any way you like. But the home must have equity to get a second mortgage. So, it permits you to get a loan or borrow money on the difference of the value of your home and any outstanding mortgage on your property.
It is considered the most convenient, safe, and cost-effective option of financing as opposed to personal loans or credit cards. It fulfills the needs for big expenses at quite low-interest rates. In the long run, the value of home raises, and the person easily pays off the principal amount of mortgage and hence equity grows.
In short, it offers innumerable opportunities for financing and even savings to the homeowner.
Home Equity Loan Types
Home equity loans are of two types. You can apply for any option that suits you the most.
HELOC- Home Equity Line of Credit
Against fixed-rate loans, HELOC works on variable rates of interest. Just as a credit card works, this loan also permits the user to borrow a specific portion of the amount that is pre-approved by the bank. This sort of loan might also be provided with a credit card to the user that allows him to make withdrawals as required via it or checks. The rate of interest and the total sum borrowed will determine monthly payments and at the very end of the period, the user needs to clear the whole outstanding amount.
Fixed-Rate Loans
In such loans, the individual gets a single lump-sum payment of a loan. At the agreed interest rate, the whole amount is required to be paid by the person over a set period. The rate of interest remains the same and doesn’t fluctuate as per market conditions over the lifetime of the loan.
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How Much Can You Borrow?
It is the common question asked by many people. How much can I borrow by via home equity loans? Well, usually it’s about 80-85% of the complete value of the home deducting the mortgage amount you owe. It’s quite simple to calculate. Let us take an example!
Suppose, the total worth of your home is $500,000 and the balance of your mortgage is $300,000. In this case, your lender allows you to borrow 85% of your home’s worth. So, the total amount you can borrow would come by multiplying the percentage (85%) that you can borrow with the home’s value ($500,000). It gives you $425,000 value that is the maximum amount you can borrow.
Now subtract the mortgage amount you already owe, i.e. $300,000 and you will come to the exact amount you can now borrow. In this particular case, it would be $125,000.
Still, there are guides and financial advisors to help you understand the exact amount you can get on Home Equity loans.
Advantages of Getting Home Equity Loans
As already stated, it’s a great option. You can opt to cover large expenses with ultimate ease, such as consolidating debt, home renovations, or other expenses can be covered under it. Also, it is easier to get qualified as the loan is already against your home property so lenders are not so hesitant to give you the loan. Here are the topmost benefits one can enjoy by resorting to it!
Unlike unsecured consumer loans or credit cards, home equity loans carry a lower and fixed rate of interest. It helps the person save money and properly get financial help without having to pay heavy interest rates regularly. It adds simplicity to the budget as fixed interest means the monthly payment amount will never increase and remains the same throughout the life of the loan.
Fixed and Lower Interest Rates
The interest that one pays on the loan taken as home equity might be deductible while calculating tax. This relaxation is in case the loan has been taken for home renovations. Furthermore, you can take the advice of tax professionals too to know the exact benefits and terms associated with it.
Deduction in Tax Amount
Here you get a lump sum amount of home equity loan that is not in installments. It means you can cover large expenses without waiting. You pay back the loan in regular monthly payments that go towards the principal and accrued interest amount. However, if the house is sold, then the whole amount of the loan needs to be paid off.
Lump-Sum Amount
The Best Ways You Can Use Home Equity Loans!
Though there are no specific limits on the usage of the loan amount, here we are sharing the top ways that will benefit you the most!
Home Improvements
The most common way to use home equity loans is home improvement. The upgrades in an existing home can use a considerable portion of savings. Instead, you can make your home improvements by getting a home equity loan without dipping into savings. Also, the upgrades make it easier for homeowners to sell their homes later.
Large projects such as kitchen renovations or complete home renovations can be financed through equity loans. It’s a good option for improvements.
Pay off Personal Debts
To consolidate debt of high-interest rates to lower interest rate, this option is the best. It’s a great way to pay off personal debts and get rid of their heavy interest rates right away. It helps reducing monthly expenses.
Long-term Investments
Sometimes for real estate investments or to have long-term benefits in the stock market, people get loans with the expectation that they will earn more than they pay in costs of the loan. It might prove risky because uncertainty prevails everywhere, either it is property investment or investments in the stock market. Still, we advise caution.
Emergency Needs
By having emergency funds you may better be able to address uncertainties. Medical bills and other expenses perhaps become difficult to pay. In this case a home equity loan might prove a smart backup to keep you afloat. It helps you contribute to your emergency fund and have higher financial access. Though the documental process is lengthy, you can pay it off in the least possible time & interest charges. We still advise you to have a backup plan too to repay the debt you are taking on to meet emergency needs.
For many other expenses such as to meet college costs, wedding expenses, business expenses, and many such reasons where capital expenditures are essential, home equity can prove the best option.
Factors to Consider Before Tapping Into a Home Equity!
So, you decided to go for a second mortgage. Here we are sharing a few points you should consider when using home equity.
Value of the Home
Usually, people get a home equity loan believing the value of the home will rise in the future and they will pay off debt easily. However, it is not always so. There’s no such guarantee of the increased value of the home over time. The economy might take a downturn and you could suffer a heavy loss. Then what will be your second plan? Such a situation is called as underwater on the mortgage. It makes it difficult to repay the loans, and you have to rely on other methods to get it done.
Borrowing Limits
There’s a limit to how much you can borrow. Your loan-to-value ratio will be calculated by the lender. By calculating the current value of the home the lenders permit a maximum of 80-85% of value to borrow, deducting existing mortgage balances. So, it is not fixed for all. It differs from person to person and depends on your current income and financial history.
Use Home Equity Amount Wisely
Some make mistakes in using the loan amount on unnecessary personal expenses such as vehicle repairing, extravagant vacations, living a luxurious life, and many such reasons. It might cost you heavily in the future. You should spend it wisely for the purpose you got the loan. Also, make sure that you don’t borrow more than you need. Keep it as low as possible so that you don’t face problems paying it in the future!
Do You Need a Good Credit Score for a Home Equity Loan?
It is not a necessity for getting home equity loans. Good credit scores matter most in unsecured loans. Credit score is a number that manifests the total risk a lender is taking when he is lending you the money. However, home equity is a secured loan offered against the property. If you are unable to pay the loan, then the home will be acquired by the lender as he possesses the right to recover the amount by possessing your property.
Getting it done by yourself might prove troublesome. So, it’s better to rely on us! We are the expert loan advisors. We guide you throughout the entire process! Contact us today at 919.523.2505.