Have you ever heard of the term home equity loan? This can be a technical term that most people find hard to understand. If you want to borrow money for home renovation or other related projects, you may opt to go for a home equity loan that allows you to use your home as collateral, however, you may use the money in however way you want but it is wise to reserve it for other income generation expenses. Home equity loans can be a smart way to access the equity built up in your home and get a lump sum of cash for large expenses.
If you’re a homeowner, you might have heard of home equity loans but might not know exactly what they are or how they work. In this blog post, we’ll explain what home equity loans are, how they work, and some of the pros and cons of using one. Whether you’re considering a home equity loan to pay for home improvements or consolidate debt, this post will provide you with the essential information you need to make an informed decision.
What exactly is Equity Loan?
Home Equity loan refers to a loan whereby lenders utilize your home as a collateral for the money borrowed which you refund over the agreed period of time at a fixed interest rate. Home equity loans duration may be from 5 to 20 years but other lenders may offer a duration of 30 years.
Home equity loan are available in two varieties these are HELOCs (Home Equity Lines of Credit and fixed rate loans. The difference between these two is in their interest rate and repayment period. In order for lenders to give you a loan, they will factor in the current market value of the home as well as the remaining unpaid mortgage.
There are several uses of home equity loans however, most people use the loan to fund home related projects such as renovations. The whole idea of home equity loan is to add value to the home so that if you wish to sell or rent out your home, it will attract good returns.
How Does Home Equity Loans Work
A home equity loan may also be referred to as a second mortgage. It is ideal to note that the lender may take over your home failure to pay the loan. Before applying for a home loan, you will need to understand the basics of how they work. You need to calculate the amount of money you need to borrow. There is need to figure out how much you project will cost you before deciding to borrow. The next step is to look for a reliable lender. Do your research and involve more than one lender for enquiries so that you can know the available rates if interest and their terms. You must have a great source of income so you are assured that you will afford to service both loans as well as your monthly basic needs. You will repay your loan every month with interest at a fixed rate.
Qualifications of a home loan
As you apply for a home equity loan, the lender will ask for the following set of requirements;
- Your credit score that should be greater than 600
- Real property value
- A verified income history
He may also opt to ask for an assessment to determine the amount of money you can borrow. You may qualify for a loan without having these qualifications but that will mean you will pay a much higher interest rate through a specialized lender.
Steps of Acquiring Home Equity Loans
Getting a second mortgage is not as hard as it sounds because the process is similar to getting a mortgage. Therefore, if you are planning to get a second mortgage, you should not hesitate. The best practice when getting a home equity loans it to take time and research on the best deals, best lenders, and interest rates. Also, be ready with the necessary documents needed such as pay slips and your bank statements. After you have fulfilled these, your lender will take time to review your application and if you meet the requirements, you will receive your money. There are some few steps to follow in order to apply and get your home equity loan, these include;
1. Determine the among of money you want
This is the first step towards the total amount of money you need to borrow. You are required to calculate the total amount of money you need before applying for the loan. In this case, you may be tempted to borrow more than you need but it will greatly affect your interest rate and the amount you will refund later on. It is advisable to stop overborrowing to avoid such inconveniences, borrow the amount you need only.
2. Determine your credit score
While applying for a home equity loan, most lenders ask for your credit score. An excellent credit score guarantees you of your eligibility to the loan and a lower interest rate if above 700. The minimum score is 620, however if you do not have such a credit score, you can improve it by doing the following; pay bills on or before time, pay dues in full and avoid opening new accounts.
3. Contrast different interest rates and lenders
Before deciding on a suitable home equity loan, you may prefer comparing different interest rates from different lenders. Interest rates differ depending on the lender you are borrowing. They may include private lenders, banks, credit unions or mortgage financial institutions. After checking your credit score, then on you can start shopping for a lender that suits your score. You should also consider their closing fees.
4. Finalize the loan application
Up to this point, you have already confirmed your credit score and chosen a reliable lender. You can now proceed to apply for the loan. You can apply online, visit their offices or over the phone. You will be required to produce a few documents such as your identification card and your financial statements and perhaps fill out a form with your personal information.
5. Approval
You will now wait for verification of the loan right after submitting your loan application and credentials. The lender will go through your documents and in some cases, he may want to inspect the assets under your name. Do not worry, you are almost there!
6. Receive you loan
As you finalize on the loan, you are required to visit your lender’s office to sign disclosures and other documentations. All this happens on the closing date and the instructions of here, how and when the closing will proceed are given to you prior. You may prefer the money to be deposited into your bank account of a cheque.
Can I use a home equity home loan for other practices?
Yes, you may use a home equity loan for other purposes such as;
- Paying debts; you may want to use the home equity loan to pay off your current mortgage or loans with high interests.
- Start a business: being that a home equity loan has a lesser interest as compared to a business loan, you may prefer to fund your new business with a home equity loan.
- Emergency: a HELOC could of much help if you didn’t have funds saved up for emergencies such as medical bills or repairs
Pros and cons of home equity loans
Pros
- Easier budgeting as their fixed rates can enable you to predict the overall payment.
- A home equity loan has a lower interest rate as compared to personal loans
- You can continue paying your current mortgage if the rate is low
- They are an easy source of funding especially if you have a reliable source of income
Cons
- Failure to pay the loan then the lender takes control of your home
- In case you sell your home before fully settling the loan, you will still pay it
- It is not flexible
- Being that they are easy to get, they can tempt you to borrow more than you need
Conclusion
We can conclude than a home equity loan is a life saver. It has lesser interest rate thus making it reliable even for first time borrowers. However, you should be careful not to overborrow just because they are easily accessible. Tapping your assets is a good way to finance your loan. If you make major improvements with the loan, you may qualify for a tax deduction. You must also be careful when shopping for a home equity loan lender. Remember to be cautious. We hope this article will be helpful enough to assist you in your decision oof applying for a home equity loan.
FAQs
1. Does a home equity loan have closing costs?
This will depend on the lender you chose. Some have closing costs while others do not, however, the closing cost is always lower as compared to that of your first mortgage.
2. How much can you borrow?
You can be able to borrow up to 85% of the value of the assets in your home. You can never borrow more than what your home equity is worth.
3. Contrast a home loan and a home equity loan
A home loan is typically the first loan you take so you can be able to purchase a home whereas a home equity loan is the loan you take after accumulating equity in the previously bought property.
4. How do I calculate my equity?
You can calculate equity by misusing your total assets and your total liabilities.
5. What are the most common types of equity?
There are several types of equity. They include: stocks, shares and your reserved earnings.