Your home is more than just a place to live—it’s one of your biggest financial assets. As property values rise and mortgage balances shrink, the value of your home grows quietly in the background. So, how about you put that value to use?
Whether you’re planning home improvement projects or need to pay for a child’s educational costs, home equity loans are a suitable way to get funding. Let’s take a closer look at what they are and how they can benefit you.
What are Home Equity Loans?
A home equity loan is a type of second mortgage that allows homeowners to borrow money using the equity they have built in their house. Equity is the difference between the current market value of your home and what you still owe on your mortgage.
For example, if your home is worth $400,000, and you owe $250,000 on your mortgage, you have $150,000 in equity. A home equity loan will let you borrow a portion of that $150,000, typically as a lump sum. You can repay it over time with fixed monthly payments and a predetermined interest rate.
To accurately determine how much you can borrow, use a home equity loan calculator. The process is quite simple. Enter basic information about your home, such as its estimated value and existing mortgage balance, to get started.
Factors that Determine Eligibility for Home Equity Loans
To become eligible for a home equity loan, you need to provide certain documentation and meet special requirements. For example, the borrower must have:
- Sufficient equity, at least 15 to 20% of the home’s appraised value.
- A good credit score, preferably a score of 720 or above.
- Suitable debt-to-income ratio, preferably below 43%.
When filing, you need to provide the following documents:
- Tax returns
- W-2 forms
- Pay stubs
All of these documents will demonstrate your ability to pay back the home equity loan.
The Pros of Home Equity Loans
Home equity loans can benefit homeowners in numerous ways. For example:
Fixed Interest Rates: Home equity loans feature a fixed interest rate throughout the loan term, regardless of market fluctuations. No need to worry about skyrocketing interest rates.
Chances of Lower Interest Rates: In many cases, you can consolidate debt with a home equity loan. As a result, you will only have to pay a single payment, which might have a lower interest rate.
Larger Borrowing Potential: Home equity loans might allow you to obtain larger sums compared to credit cards or personal loans.
Extended Repayment Timelines: Most home equity loan providers offer an extended repayment timeline, spanning up to 30 years. This means flexible and manageable monthly payments.
Common Fees with Equity Loans
Before applying for a home equity loan, consider the associated fees. In most cases, you would be paying the following:
- Origination fee
- Appraisal fee
- Credit report fee
- Filing fees
- Title fees
Research and planning before applying for a home equity loan can help you find lower interest rates.
