One of the most valuable benefits of owning a home is building equity. Whenever you need a considerable amount of cash, you can get it by borrowing against your equity with a home equity loan. How you use the funds is up to you. Some choose to remodel the kitchen. Others need it to pay off high-interest-rate credit card debt or medical bills.
Whatever your reasons are for needing a lump sum of additional cash, know that you have it available to you through the wealth stored in the value of your home.
In this article, you'll learn what home equity loans are and how to qualify.
All About Equity
Home equity is the difference between what you owe on the mortgage and how much the home is worth today. For example, if you owe $100,000 on your mortgage and your home is worth $250,000, you have $150,000 worth of equity. The first step to getting a home equity loan is to know if you have enough equity to borrow against.
All About Home Equity Loans
A home equity loan, sometimes called a second mortgage, is paid off with monthly payments, just like a primary mortgage. Lenders will usually set limits as to how much they'll approve you for. For instance, if you have $70,000 of equity, you might get approved for a maximum hoof $60,000.
You'll receive the funds in a single lump sum and pay it back (plus interest) over a predetermined number of years.
Pros And Cons Of Home Equity Loans
Home equity loans have lower fixed interest rates than personal loans. Many find it useful to get the funds in a lump sum to get started on the project or pay off that debt ASAP.
Since your home acts as collateral, if you're unable to pay back the loan, the lender could foreclose on your home.
Also, a home equity loan adds to your monthly debt and depending on how tight your budget is, a second monthly mortgage payment could prevent you from building up your savings.
Getting Approved For A Home Equity Loan
Getting a home equity loan is similar to getting approved for a primary mortgage. Your credit will be evaluated, as will your income and existing monthly payments – including what you pay on your current mortgage.
As a general rule of thumb, if you want approval for a second mortgage, your debt should equal no more than 43% of your gross monthly income. You'll also need a minimum credit score (typically 620) and maintain at least 15-20% equity in your home.
Home Equity Loan Alternatives
Not sure if a home equity loan is what you need? Check out these alternatives:
Home Equity Lines Of Credit
A home equity line of credit (HELOC) acts like a credit card, with the credit limit based on the amount of your home equity. With a HELOC, you only pay back what you use.
For example, if you get approved for a HELOC of $60,000 but only use $25,000, you'll only make payments on $25,000 plus interest – not the full $60,000.
With this option, you'll refinance your current home loan into one that has a higher balance than what you currently owe. You'll then receive the "extra money" in a lump sum to use however you want.
For example, if your current loan is $120,000, you can refinance for a new mortgage with a balance of $160,000. You'd then receive the $40,000 difference as a single payment.
The main benefit of a cash-out refi is that you'll still have just one single mortgage payment a month. Plus, depending on your credit score, you might qualify for a lower interest rate.
We encourage you to get personalized answers to your home equity questions by contacting us today