What is a Home Equity Loan
What is a Home Equity Loan?
It’s a commonly asked question: what is a home equity loan? In short, a home equity loan allows homeowners to borrow money using their home’s equity as collateral.
With a home equity loan, homeowners can lose the home and be forced to move out if their debt is not repaid.
A home equity loan is a type of second mortgage. Your “first” mortgage is the one you used to purchase your home, but you can use additional loans to borrow against the property if you have built up enough equity.
Why use a home equity loan?
Home Equity Loan Advantages
Home equity loans have recently been gaining more and more popularity. The loans prove attractive to both borrowers and lenders, here’s why:
- Safe for lenders (with house as collateral)
- Lower interest rates than unsecured loans
- Easier to qualify if you have subpar credit
- Borrowers can qualify for large loan amounts
- Interest costs may be tax deductible
If you we’re initially wondering — what is a home equity loan? — you may now be sold thanks to these clear benefits. Wait! There are a couple things you should know first..
You NEED Equity
Equity is the difference between how much the home is worth and how much you owe on the mortgage. So if you owe $200K on your mortgage and your home is valued at $250K, you have $50K (or 20%) in equity.
This can also be depicted by loan-to-value ratio, or the remaining balance on your loan compared to the property value. Our loan-to-value ratio is 80% in this scenario ($200,000 being 80% of $250,000).
Furthermore, lenders typically insist borrowers have at least an 80% loan-to-value ratio remaining after the home equity loan. Meaning that to even qualify, you’ll need to own more than 20% of your home.
There’s 2 Home Equity Loan Options
- Lump-sum: Take a large sum of cash and repay the loan over time with fixed monthly payments. Your interest rate can be set up-front, and each monthly payment reduces your loan balance and covers some of your interest costs.
- Line of Credit: Get approved for a maximum amount available, and only borrow what you need. Known as a home equity line of credit (HELOC), this option allows you to borrow multiple times. It also allows you to make smaller payments for several years.
When asking yourself—what is a home equity loan and how do I get one?!—it’s important to know your options. Both types pose advantages and disadvantages, though the HELOC is known as the more flexible option.
Final Word
Again, it’s important to make sure this type of loan makes sense for your financial situation. Especially relevant, if you’re looking to borrow small amounts of money, this loan may not be the right choice.
If you think a home equity loan could be right for you, however, be sure to check rates.
Click here to let the top home equity loan lenders compete for your best rate!
