Home equity loans are essentially considered as a second mortgage. They let you borrow money using your home as collateral, even when the mortgage still has a balance on it.
The amount of loan you can take is often based on the difference between the amount you owe on your initial mortgage, the appraised value of the property, and a few other factors.
Unlike the original mortgage, home equity loans let you use the money for any purpose so long as you can pay it off in a predetermined amount of time.
This may sound like a really good deal, but what’s the catch?
Since you’re using your home as collateral for home equity loans, you run the risk of losing your home if you are unable to pay back the money you borrowed.
So why take them?
The reasons why you should take home equity loans are similar to why you should take loans for any other purpose.
When there’s an immediate need for a large amount of cash for any major expense or events such as medical emergencies, car and house repairs, or loan consolidation, home equity loans are a quick and easy means to get cash from a bank or financial institution.
As a secured loan, financial institutions have more confidence in loaning you money. They may also let you borrow a larger sum, compared to personal loans.
How does it work?
Home equity refers to the amount that you have paid against the amount still owed on the mortgage.
Even when the house isn’t fully paid, the equity is considered an asset.
Luckily, there are ways to leverage the equity you have invested toward your mortgage either by taking a Home Equity Line of Credit (HELOC) or a Home Equity Loan.
A HELOC is a line of credit that works similarly to credit cards. You can draw small sums as needed against a preset credit line. A home equity loan is a lump sum loan, taken all at once. Both use your home equity as collateral.
Lenders will normally let you borrow up to 85% of the equity in your home.
Although it would take time before you can pay off the principal and start building your equity. Most lenders require that you own at least 20% of the value of your property as equity in order to qualify for a loan.
To put it simply, the more equity you have, the higher the amount you will be qualified to borrow.
There are still other factors that lenders will consider that determine the maximum amount you can borrow. This is where your monthly income, existing debts, and credit scores come into play.
Which leads us to the next question.
Where to begin?
Before applying for a home equity loan, always ask yourself the question: Can I afford to repay this loan without risking losing my home? If you answered yes, then you may be ready to take a home equity loan.
Credit score is a huge deciding factor for lenders in considering your application for either a HELOC or home equity loan.
If you don’t already know it, find out your credit score.
A score of 760 or higher will likely qualify you for the best interest rates. Lower scores won’t necessarily mean that you can’t get a loan, but you may not get the best rates or other terms. Also, the lower your credit score, the more difficulty you’ll likely have in finding a lender willing to loan you money.
Aside from interest rate, your credit score may also determine how much you can borrow. As with other things already mentioned above, this is only one of several factors that lenders take into account.
Also consider the number of other loans you are repaying at the moment. Having multiple other loans and debt at the time of application may work against you when applying for home equity loans.
It’s always recommended that you shop around for the best interest rates and get yourself acquainted with any processing and lender fees that will be added on top when closing your loan agreement.
Lenders are required to disclose these fees before you take the loan. Pay particular attention as these fees are often in addition to the amount you borrow. Since they typically get added to the loan balance, you’ll pay interest on them as well.
To sum up, if you have an excellent credit score and not much debt, and if your budget will allow for increased monthly payments, you’ll have greater chances of getting approved for a home equity loan.
This can allow you to leverage your assets and use the money to pay for major expenses or even for business purposes.
There are always pros and cons. Assessing yourself and your capacity to take on more debt is always the first step. It can give you a lot of insight in making smart moves with your money and investments.
Whether you are planning for a major house renovation project, or need a large amount of cash for an emergency expense or consolidation of your loans, Calcite Credit Union is here to help! We offer competitive rates for your home equity loans with simple, quick and easy terms. Contact us today for more information!