A home equity loan is a method of borrowing money for great things, and understanding the facts about these complicated loans is crucial to help you make the right decision for your finances.
If you are considering a home equity loan, here are 13 things you need to know first.
1. What is a home equity loan?
A home equity loan or PGH-is a loan where the borrower uses the equity of his home as collateral. These loans allow you to borrow a large lump sum based on the value of your home, which is determined by an appraiser, and your current capital.
Capital loans are available either fixed or adjustable rate loans and come with a fixed amount of time to pay off the debt, usually between 5 and 30 years. You will have to pay closing costs, but it will be much less than what you pay for a typical full mortgage. The fixed rate of PGHs also offer the predictability of a regular interest rate from the start, which some borrowers prefer.
2. What are home equity loans better for?
A home equity loan is generally better for people who need cash to pay a significant expense, such as a home renovation project. Home equity loans are not particularly useful for small money loans.
Lenders usually don’t want to be bothered with making small loans – $ 10,000 is the least you can get. Best Bank, for example, has a minimum loan amount of $ 25,000, while Discover offers mortgage loans in the range of $ 35,000 to $ 150,000.
3. What is a home equity line of credit?
A home equity line of credit – or LCGH – is a lender that establishes the renewable line of credit based on the equity of your home. Once the limit is set, you can draw on your credit line at any time during the life of the loan by writing a check against it. An LCGH is similar to a credit card: You do not need to borrow the total amount of the loans and the available credit is replenished while paying. In fact, you could pay the loan in full during the advance period, borrow again the total amount, and repay it again.
The draw period usually lasts approximately 10 years and the repayment period usually lasts between 10 and 20 years. You pay only interest on what you actually received from the available credit loans, and you generally do not have to start paying the loan until after the draw period closes.
LCGH loans sometimes also come with annual fees. LCGH interest rates are adjustable and are generally linked to the prime rate, although they can often be converted at a fixed rate after a certain period of time. It is also often needed to pay the closing costs of the loan.
4. Why are credit lines better?
Credit lines are better for people who expect to need different amounts of cash over time, for example, to start a business. If you do not need to borrow as much as PGHs require, you can opt for an LCGH and borrow only what you need instead.
5. What are the benefits of home equity loans and lines of credit?
Beyond access to large sums of money, another advantage of home equity loans and lines of credit is that the interest you pay is generally tax deductible for those that detail deductions, of the same mortgage interest. The Federal Tax Law allows you to deduct mortgage interest up to $ 100,000 in mortgage debt ($ 50,000 each for married people filing separately). There are certain limitations however, so check with a tax advisor to determine your eligibility.
Because PGH and LCGH are guaranteed by your home, rates tend to be lower than what you would pay on credit cards or other unsecured loans.
6. What are the disadvantages of PGH and LCGH?
The debt you can take from a PGH or LCGH is guaranteed by your home, which means that your property could be in danger if you cannot make your loan payments. You may be excluded or lose your home if you are behind in a home equity loan, the same as your primary mortgage. In the case of foreclosure, the primary mortgage lender is paid first, and then that of the mortgage guarantee is paid of what is left.
If the value of your home decreases, you can go underwater and demand more than the house is worth. The rates for PGH and LCGH also tend to be somewhat higher than what you could currently pay for a mortgage, and closing costs and other charges can add up.
7. How can I determine my equity?
If you are interested in learning how to qualify for a home equity loan, you first need to determine how much capital you have.
Equity is the part of your home that you own, compared to what you still owe the bank. If your home is valued at $ 250,000 and you still owe $ 200,000 on your mortgage, you have $ 50,000 in equity, or 20%.
The same information is more commonly described in terms of the loan-to-value ratio, that is, the remaining balance of your loan compared to the value of the property, which in this case would be 80% ($ 200,000, 80% being 250,000 Dollars).
8. How can I qualify for a home equity loan?
Generally, lenders require that you have at least 80% of the remaining loan-to-value ratio after the home equity loan to be approved. That means you will need to own more than 20% of your home before you can qualify for a home equity loan.
If you have a $ 250,000 home, at least 30% equity would be needed – a mortgage loan balance of no more than $ 175,000, in order to qualify for a $ 25,000 loan or credit line.
9. Can I get a home equity loan with bad credit?
Many lenders require good to excellent credit ratings to qualify for mortgage loans. A score of 620 or higher is recommended for a home equity loan, and you may have even a higher score to qualify for a home equity line of credit. However, there are certain situations in which home equity loans may still be available for those with bad credit if they have considerable equity in their home and a low proportion of debt to income.
If you think you will be in the market for a home equity loan or credit line in the near future, consider taking steps to improve your credit score.
10. How soon can I get a home equity loan?
Technically, you can get a home equity loan as soon as you buy a house. However, home equity builds up slowly, which means it may take a while before you have enough capital to qualify for a loan. In fact, it can take five to seven years to start paying the principal balance on your mortgage and start building the equity.
The normal processing time for a home equity loan can be anywhere from two to four weeks.
11. Can I have several lines of credit with mortgage guarantee?
Although it is possible to have multiple lines of credit with mortgage guarantee, it is rare and few lenders offer them. You would have substantial equity and excellent credit to qualify for several loans or lines of credit.
Applying for two LCGHs at the same time but from different lenders without reporting it is considered mortgage fraud.
12. What are the best banks for mortgage loans?
Banks, credit unions, mortgage lenders, brokers and all offer home equity loan products. A little research and some stores around will help you determine which banks offer the best mortgage guarantee products and interest rates for your situation.
Start with the banks where you already have a working relationship, but also ask around for referrals from friends and family who have recently received the loans, and be sure to ask about the fees. Experienced real estate agents can also provide some ideas in this process.
13. How to apply for a home equity loan
There are certain requirements for home equity loans that must be met before you can apply for a loan. To improve your chances of being approved for a loan, follow these five steps:
- Check your current credit score. A good credit score will make it easier to qualify for a loan. Review your credit report before applying. If your score is below 620 and you are not desperate for a loan now, if you wish, you can take steps to improve your credit score before applying.
- Determine the equity available. Your equity determines how large the loan you qualify for can be. Have an idea of how much equity your home has by checking sites like Zillow to determine your current value and deduct how much you still owe. An appraiser of the lender will determine the official value (and therefore its equity), when it is applied, but you can get a good idea of how much equity you might have by doing a little personal research first.
- Verify your debt. Your debt ratio will also determine your probability of qualification for a home equity loan. If you have a lot of debts, you may want to work on the payment from the fund before applying for a home equity loan.
- Research rates in different banks and lending institutions. Not all banks and credit institutions require the same rates, fees, or credit titles. Do your research and review several lenders before starting the application process.
- Collect the necessary information. Applying for a home equity loan or credit line can be a lengthy process. You can speed things up by collecting the necessary information before you start. Depending on the lending institution you are working with, it may be necessary to provide a deed, pay stubs, tax refunds, and more.