Guide to Home Equity Loans: The Pros and Cons, Requirements and Limits
How does a home equity loan work?
Home equity loans are one way to meet your financial goals. You turn your home’s equity into cash. Home equity loans can be obtained at a bank, online lender or credit union.
Equity is the difference in the property’s worth and what you owe your lender to pay your mortgage. Equity can grow in many different ways. Equity can grow in many ways. It can rise if an area’s realty value goes up or if the borrower pays their mortgage on a consistent basis.
The amount that you can borrow will depend on the equity in your home and other financial factors. Once you have been approved to borrow a home equity mortgage, the lender will tell you the amount of the loan, the interest rate, monthly payments, and the term. After you accept the terms of the loan, the lender will release the funds to you as a lump sum.
Common Uses of a Home Equity Loan
The decision about how to spend the money from a home equity loans is up to you. MoneyGeek advises you not to use the money for anything but important. Some examples can be found in this table.
- Home improvement: This is the classic use for a home equity loan. The pain of incurring additional debt will usually be offset by the increased value of your home.
- Paying down Credit Cards: A home equity loan can be used to pay off credit card debt.
- College Costs: This isn’t an easy task. It is important not to sacrifice your retirement stability in order to subsidize the tuition costs of your children.
- Investments You can use the proceeds to buy an investment property, or to start your own business. The obvious risk is that you will not be able to repay the loan if the investment fails.
- Debt Consolidation If your high-interest debts include student loans, car loans, and private student loans, you may be able to make a savings by getting a home equity mortgage to pay it off.
Calculating Equity
How do you calculate how much equity your company has? While it is not an exact science you should be capable of getting an answer that is close to the truth. First, you must know how much your mortgage owes. You should get monthly statements from your servicer or lender. This information should be up-to-date every month. If you do not receive monthly statements from your lender or servicer, please contact them to check your balance. Next, you will need to find out how much your house is worth. A full appraisal could cost hundreds of dollars. However, it’s possible to get an estimate for much less. Redfin.com as well as Zillow.com offer automated valuations.
Redfin claims that its estimates for homes that aren’t on the market often land within 6 per cent of the actual value. A local property appraiser, which is a public official who estimates the home’s worth for property tax collection purposes, can also give a reliable estimate. Be aware that many property appraisers aim to achieve a market value below the full value. These values are usually updated once per year to avoid swings in the year. If you have any doubts about the value or condition of your home, talk to the Realtor or Loan Officer you used when you purchased it.
A Home Equity Loan: The Pros and Cons
The best home equity loans are for those who know what they want to do with the money, and how much they can spend. For major expenses, such as education and home renovations, it’s best to borrow home equity.
There are many benefits to home equity loans. However, not everyone should consider it, especially if they don’t wish to put their home at risk.
Overborrowing could be a risk that can cause you to become overwhelmed with debt. It’s important to evaluate the pros and con’s of a home equity mortgage to determine if it’s worth your time.
Interest Rates and fees for Home Equity Loans
The cost of your home equity loans is often more costly than your primary mortgage. The home equity loan rate is more competitive than personal loans and cash out refinances.
Home equity loan rates are affected by credit scores, credit limits, prime rate, credit score and loan to value (LTV). The prime rate is often used as a benchmark by lenders. However, it is possible to use another index like the London Interbank Offer Rate. Rates also depend on loan terms. A longer term means a higher rate. High loan-to-value ratios mean that rates will rise because lenders are at greater risk of losing their money.
Other than the home equity loan interest you will also need to cover appraisals, credit checks, and title work. There are two types of closing costs: some lenders cover them and others don’t. Some lenders require that borrowers repay closing costs if they do not meet certain conditions.
Applying for a Home Equity loan
Many people are eligible for home equity loans. A home equity loan is available to anyone with excellent credit and significant equity. Most lenders require that your FICO score be between 720-740 in order to approve your application. If borrowers have a history of income for at least two years, they may be eligible to borrow with a credit score of 620.
Applying for a home equity loans is similar to applying for a mortgage. All you will need is proof of income and credit. Your lender may require you to pay for title searches and appraisals. A Social Security number is required by banks to verify your credit score. The bank will ask for documentation if you have any investment income or self employment income.
HELOCs vs. home equity loans
You can also turn your home equity into cash by getting a Home Equity Line Of Credit. It works like a credit-card, where the cardholder is given a revolving line. Borrowers get a predetermined amount of money, and they can withdraw it as often as they need.
HELOCs allow the borrower to draw within the time frame that the lender has set. This period is usually between 5-10 years. A repayment period is established after the draw period. Borrowers cannot withdraw money.
HELOCs have variable rates of interest, so rates can change according to market conditions.
Home equity loans are the best option to get cash.
Home equity loans might appear to be a quick and easy way to access your property’s potential value. Ed Conarchy from Cherry Creek Mortgage in Gurnee says that refinancing all of your mortgage is a wiser move.
Conarchy suggests that you just redo your initial mortgage. “You’ll get a slightly lower interest rate and get the cash.”
Home equity loans are typically one point above the Wall Street Journal prime rates (which was at 3.5 percent during most of 2016), so the loan rate of 4.5 percent is roughly one point lower than the 30-year average mortgage rate. You can also expect home equity rates to fluctuate, so they could go up.
A home equity loan is a good option for a rainy-day fund.
Any time you want to cancel your home equity line of credit, it is possible. Home equity loans, unlike a mortgage, can be withdrawn at any time.
Conarchy states that a home equity loan is essentially a personal mortgage secured against your house. The banker can call or freeze the loan. We witnessed this happening all the way through 2008. We have this to say: A home equity line credit is not a rainy day fund.
- Lenders can cancel a loan if you lose your job, or your property value drops.
- Home equity loans can be a smart alternative to mortgage insurance.
You must pay mortgage insurance if your loan exceeds 80 percent of the home’s worth. Borrowers used to be able to skirt this requirement by getting a second “piggyback” loan. This tactic is now under threat because mortgage insurance premiums are on the decline in recent years.
Conarchy declares that “Piggyback loan” no longer makes sense. “Mortgage Insurance has never been more affordable than it is today.”
