How To Get Home Equity Loan – Go-Through Guide
A home equity loan is a type of loan specifically designed to borrow some money using your home as collateral. It will help you get a lump-sum amount and repay the loan in the determined period over a fixed interest rate.
A home equity loan helps you to determine the value of your home without selling your home. As you pay the installments of your mortgage and the value of your property increases with time, the share of the home you own also increases. By getting a home equity loan, you convert the owned home back into debt in return of cash.
Home equity loan is a well known option for homeowners looking forward to any home improvement plan. You are free to use your money wherever you want to use it. But it is recommended to reserve it for expenses that build wealth.
As your home is reserved as a collateral for a home equity loan, if you fail to repay the loan you should keep in mind that it is at risk of foreclosure of the home. If you are looking to get a home equity loan, here are some factors you should consider or you want to keep in mind.
What is a home equity loan?
A home loan allows you to turn some of the apartments in your home into cash. Then afterwards, you receive this lump-sum amount that you pay back over a fixed period of time in the form of installments. This loan offers a benefit of fixed interest rate. The funds repayment time ranges from 5 years to 30 years depending upon the loan amount and it varies from lender to lender.
Most of the lenders ask you to have at least 20% share or equity or ownership in the home. While some of them will allow you to get 90% of your home as a loan. As per the rules and regulations of National Association Realtors, the homeowners who have experience and made an average down payment of 17% last year, are eligible for home equity loan with most of the lenders after they just closed. The homeowners who are buying homes for the first time, may have to choose multiple lenders with higher CLTV.
Uses of Home Equity Loan
A home equity loan can be used for repair, renovation or any type of project to modify your home that adds to the value of the home. According to the data collected from the U.S. Census Bureau’s 2021 survey American Housing Survey shows that a project that is financed by an equity loan costs $11,240 on average. These reports reveal the fact that the kitchen seems to be more expensive as compared to other renovations.
Homeowners can use all money they get from a home equity loan for anything they want. But it is not recommended to use money they get from a home equity loan for personal or vacation expenses. Because these expenses don’t add value or can’t be recouped.
How Much Can You Borrow With a Home Equity Loan?
A home equity loan more frequently allows you to borrow up to 80% to 90% of your home’s value. Also it minimizes what you have got by pledging your home. Some lenders can also allow you to borrow more than 90% or in some instances 100% of the total value of your home.
Requirements to Get Equity Loan
The requirements to qualify for an equity loan vary from lender to lender. Here is the precise list of the requirements most of the lenders have in common.
- Home equity or ownership of at least 15% to 20%.
- A credit score of 620 or higher.
- Debt-to-income ratio of 43% or lower.
In order to confirm the present market value of your home, your lender may also ask you for an appraisal to calculate the amount you’re eligible to borrow.
Are Home Equity Loans Good Idea?
Are you confused about whether getting a home equity loan is a good idea or not? It fully depends upon your financial conditions and your plans to do with the money. Using a home as collateral is a big risk, so it is highly recommended to compare the pros and cons of the equity loans before signing up for them.
Pros:
- Lower interest rate as compared to personal loans.
- Fixed rates make budgeting more predictable and easy to manage
- Interest is deductible in case you use a loan for renovations.
Cons:
- Less flexibility as compared to HELOC.
- If you sell the home before repaying the loan, the lent amount will be due on you.
- You may have to pay closing amounts to finalize securing a home equity loan.
Conclusions
A home equity loan is a valuable financial tool for homeowners looking to leverage the value of their property without selling it. By using your home as collateral, you can secure a lump-sum amount to be repaid over a fixed period at a fixed interest rate. This type of loan is particularly useful for funding home improvements, which can increase the value of your property.
However, it’s important to use the funds wisely, ideally for expenses that build wealth. Remember, failing to repay the loan could result in foreclosure, so carefully consider the pros and cons before deciding.
