Unlike home loans, home equity loans are a different type of home loan. It is also called a second mortgage or an equity loan. A home equity loan is the best and easiest to get, and it also makes things better for homeowners. These factors, together with others, lead many homeowners to ask, “What is a home equity loan?”
A home equity loan is a popular choice for homeowners who want to make some improvements to their home. Instead of using your money, it is advisable that you save it for later and take a home equity loan for your home improvement.
What Does Home Equity Loan Mean?
A home equity loan, also known a second mortgage, is a type of loan that uses a borrower’s home equity as a pledge. They are received in the form of a lump-sum payment that you are meant to repay with a fixed interest rate over a period of time agreed upon.
You can borrow more than 90% of your home’s value, but most lenders will request at least 20% of your home’s equity. The amount of equity loans is based on the difference between the home’s recent market value and the balance of the homeowner’s mortgage.
How Does An Equity Loan Work?
Home equity loans are loans that finance a portion of the value of a home, with your property acting as collateral. It has benefits and disadvantages for the home owner, but it is an effective step to take.
As a homeowner, going for home equity gets you qualified for a better rate than a loan. If you want to get an equity loan, you need to first figure out the amount you need to borrow. It is different from HELOC [home equity line of credit] that lets you get a credit line you need.
Instead, this loan requires the homeowner to have a real knowledge of how much the project will cost. Once you are familiar with the amount of money you need, you now need to calculate the equity value of your equity relative to your home’s value.
After this has been done, you need to proceed with looking for a lender. It is better to get in touch with more than one lender so you can easily identify the one that is best.
Finally, you will get the complete amount, and you will have to pay back the equity loan, i.e., its principal and interest, every month. This lasts for a fixed number of years. However, make sure you are able to add the second mortgage payment to the mortgage you currently have, along with other monthly expenses.
What Can I Use a Home Equity Loan for?
Home equity can be used for renovation, repair, property, shares, or projects that add to your home’s value. For any of these you will like to carry out, you can get an equity loan to fix them up and enjoy the benefits of getting this loan.
How Much can I Borrow With a Home Equity Loan?
Generally, you can borrow 80% to 85% of the value of your home minus your mortgage debt. Some home equity lenders allow you to borrow up to 100% in some cases. For example, if your home costs $350,000, the balance of your mortgage will be $200,000, and your lender will let you borrow up to 85% of the value of your home.
Home Equity Loan Requirements
Before you can get this loan, there are some things you need to provide. With these requirements, getting this loan won’t be that difficult. Well, requirements for home equity loans vary depending on the lender. But below are some of the requirements that almost every lender will require.
- 620 credit score or more.
- A home equity of 15% to 20% at least.
- A 43% debt-to-income ratio or lower.
However, to confirm the requirements of your equity loan, you need to check that out with the lender.
Are Home Equity Loans A Good Idea?
This depends on your financial situation and what you need the money for. Making use of your home as collateral has a lot of risk; therefore, if it’s worth it, it may be a good idea for you.