Looking for the best way to consolidate your debt or pay for major expenses? Then look into a home equity loan. A home equity loan is a common type of loan or line of credit that involves the borrower using his or her home as collateral. The amount of money a person is able to borrow will primarily depend on the value of the property determined by an appraiser hired by the lending institution. Home equity loans can be used for a wide range of purposes, from paying high medical bills to making essential home repairs. Learn more about home equity loans, how they work, and where you can get one.
How Does a Home Equity Loan Work?
A home equity loan, also known as a second mortgage, is a popular option for homeowners who wish to take out a low interest loan. However, these loans often work differently than traditional loans, acting as a line of credit. There are three main types of home equity loans available, including:
- Traditional Home Equity Loans: This type of loan allows homeowners to borrow a fixed amount of money in a single lump sum. While the terms can vary from lender to lender, most traditional home equity loans come with a fixed interest rate, monthly payment amount, and loan term.
- Home Equity Line of Credit: Also known as HELOC, this type of home equity loan involving a revolving debt that allows you to borrow money as needed. With a HELOC plan, you have the opportunity to draw funds during a set “draw period.” At the end of the draw period, you may be required to repay the entire amount or may have the opportunity to make monthly payments.
- Cash-Out Refinance Loans: These loans allow homeowners to borrow a fixed amount of money against the equity in their home by refinancing their current mortgage into a new home loan for an amount larger than what they currently owe. The difference can then be taken out in cash.
Who Qualifies for a Home Equity Loan?
While a home equity loan does not usually have the strict requirements that other types of loans have, not all homeowners are eligible. To qualify for a home equity loan in 2018, you will first need to have sufficient equity. When applying for a home equity loan, know that the lender will not allow you to borrow 100 percent of your equity. Institutions use a tool known as loan-to-value (LTV) ratio to determine how much you can borrow. LTV is calculated by adding the amount you owe on your home to the amount you want to borrow. This number is divided by the market value of the home to determine LTV.
In order to qualify for a home equity loan, you must also show the lender that you make enough income to cover the cost of your current bills and debts, in addition to any new debts that you will be taking on. While eligibility is not entirely based on your debt-to-income ratio, this may be a contributing factor when determining your ability to pay back the loan. Along with looking at your debt, the lender will also peek at your credit history including what types of credit accounts you have, their balance, and how long they have been open. Items on your report like late payments may have a negative impact.
What are the Benefits of a Home Equity Loan?
Many homeowners find that they need some financial help at one point or another. A home equity loan is one way to get a large sum of money without having to take out a high interest credit card or personal loan. One of the biggest advantages to choosing a home equity loan is the lower interest rates that most lenders offer. Home equity loan interest rates are often considerably lower than credit card APRs as they are considered “secured” by your home’s collateral. Therefore, lenders are more confident in your ability to pay back the loan.
Another major perk of a home equity loan is the possible tax deduction available for homeowners. Unlike credit card debt, home equity loan interest payments are often tax deductible. However, you will want to talk with a tax advisor to determine if you qualify for such deductions. Another benefit to consider is that the money you get from a home equity loan is actual cash. Unlike credit cards which are not accepted everywhere, a home equity loan provides a cash payment that can be used to pay off medical bills, educational bills, contractor costs, or other important expenses.
Certain types of home equity loans, such as a home equity line of credit, offer homeowners even more benefits in the form of flexibility. When homeowners are able to draw from their line of credit as they please, it can create a sense of financial protection. Whether you run into a costly car expense or have a roof repair emergency, it can be helpful to have a source of funds available to take care of these unexpected occurrences. Best of all, homeowners only need to make payments on their home quality line of credit when they use it, much like a credit card. This means you will have money available when you need it without having to deal with extra fees.
Contact a Mortgage Broker for More Information
If you are dealing with certain financial troubles, you may be considering taking out a home equity loan. While not right for everyone, home equity loans can be very useful for homeowners who wish to borrow a lump sum of money at a lower interest rate then they would with ordinary credit cards. However, before making the decision to take out a new loan, be sure that you have the means to repay it as your home is on the line. If you want to learn more about home equity loans or want to apply for one, contact an experienced mortgage broker in your area.