Home equity loan is a type of loan second mortgage, which enables you borrow against your homes value minus the amount of any outstanding mortgages on the property.
How Home Equity Loan Works
Home equity loans are capable of offering access to large amounts of money and is a little bit easy to qualify for more than other types of loans since you’re putting your home as collateral.
Home Equity Loan Pros
With home equity loan, you’ll pay less interest than you would on a personal loan because a home equity loan is secured by your home.
You can claim a tax deduction for the interest you pay in case you use the loan to “buy, build, or substantially improve your home”, as stipulated by the IRS.
Afair bit of money canbe borrowed if you have enough equity in your home to cover it.
Home Equity Loan Cons
There’s a risk of losing your home to foreclosure if you fail to make loan payments.
You’ll be required to pay closing costs.
The debt must be paid off immediately and entirely if you sell your home, just like you would your first mortgage.
How to Get a Home Equity Loan
To get a home equity loan, apply with several lenders and compare their costs, including interest rates. Note that loan estimates can be gotten from several sources, including a local loan originator, an online or national broker, or your preferred bank or credit union.
Lenders will also check your credit and might even need a home appraisal to firmly establish the fair market value of your property as well as the amount of your equity. Note, that several weeks or more may pass before any money is made available to you.
Lenders also most times base their approval decisions on a few factors. They include; You most likely to have at least 15% to 20% equity in your property. A secure employment is required, at least as much as possible as well as a solid income record even if you have changed jobs occasionally. There should be a debt-to-income (DTI) ratio of no more than 43%,even though some lenders will consider DTI ratios of up to 50%. A credit score of at least 620 would also be needed.
Have a Poor Credit?
Most times equity loans can be easier to qualify for if you have a bad credit. This is because lenders have a way of managing their risk when your home is securing the loan. Even at that, approval is not guaranteed.
Even though collateral helps, lenders have to be careful not to lend too much or they risk significant losses.
All mortgage loans normally need extensive documentation, and home equity loans are only approved if you can demonstrate an ability to repay the loan. By the law, lenders are required to confirm your finances, and you’ll have to provide a proof of income, access to tax records, etc.
The Loan Value Ratio
Lenders always try to ensure that you do not borrow any more than 80k or there about of your home’s value, because it takes into account your original purchase mortgage and the home equity loan for which you are applying. The percentage of your home’s available value is known as the loan-to-value (LTV) ratio and what’s acceptable may vary depending on the lender. Some even allow LTV ratios above 80%, but will require you to typically pay a higher interest rate.
Alternatives to Home Equity Loans
Other than home equity loans, you do have other alternatives you can turn to;
These mortgages are made to suit homeowners who are aged 62 or older, especially those who have paid off their homes.
How this works is that you have your lender send you a check each month representative of a small portion of the equity in your home. This gradually depletes your equity, and the lender charges interest on what you are borrowing during the term of the mortgage. Note that you must keep living in your home or the entire balance will come due.
Here, your existing mortgage is replaced with one that pays off that mortgage and offers you a little or a lot of extra cash besides. Here, you would borrow enough to both pay off your mortgage and give you a lump sum of cash. You do not need sufficient equity, but you’d only have one payment to bother about.