If you own a home and need some extra cash, getting a home equity loan may be the perfect answer. Although home equity loans tended to become very rare during the recent housing market collapse, they are once again very popular. nowadays. Get all the facts on these beneficial loans right here and learn how to apply for one.
Recommended read – How to Apply for a Mortgage
Understanding the Home Equity Loan
A home equity loan is one you can get based on your home’s equity. The loan is secured by your home in the same way that your regular mortgage works. You can get the money all at once or in installments depending on the loan terms and your needs. These loans are popular among homeowners because they offer lower interest rates and better terms than traditional loans. Many review state that home equity loans are the best types of loans.
Limits and Amounts
The amount you can borrow on an equity loan is based on your home’s value. It also depends on how much you owe on your first mortgage. Lenders will generally only give you up to 80 percent of the home’s value.
For example, let’s say your home is valued at $150,000 and you currently owe $90,000 on your mortgage. This leaves you with an equity of $60,000 ($150,000 – $90,000). If the lender gives you to 80 percent, you may be able to get an equity loan for $48,000 ($60,000 X .80 = $48,000).
Although your home’s equity plays a large part in determining how much you can borrow, it’s not the only thing. Lenders will also look at your income to debt ratio, your ability to repay the loan, and your credit scores.
What Types of Home Equity Loans Are There?
The equity loan come in two types.
• Standard Home Equity Loan – This is the scenario where you borrow one lump sum. If you’re buying a car or doing something where you know how much money you’ll need, your lender will probably steer you towards this type of loan.
• Home Equity Line of Credit – This loan, known as HELOC, has a fixed maximum amount that you can borrow. However, it allows you to take out smaller amounts as needed until you reach the maximum. If you’re doing remodeling, for instance, and don’t yet know what your total will be, your lender will recommend an HELOC.
How to Apply for a Home Equity Loan
Applying for your equity loan can actually be simpler than you’d think. You can visit your local lender or find one online. You can even apply via the internet. There are many online options, according to ConsumerAdvocate.org. Once you’ve determined the lender you’re going to go to, here are the general steps toward getting your equity loan.
• Get your financial affairs in order. The first thing your lender will do is obtain a copy of your credit scores. This is the biggest factor in determining eligibility for the loan. Therefore, if you have any lingering debts, this is the time to take care of them. Moreover, knowing your credit worthiness will also give you an idea of what to expect.
• Know the current balance on your loan. This is what determines the amount of equity you have in your home.
• Get documentation ready. The lender will want to see proof of income, employment, and homeowner’s insurance. Therefore, the quicker you can provide this information, the quicker you’ll get your loan approved.
• Fill out the application. Whether you apply online or in person, you have to fill out the application with accurate information.
• Wait for the appraisal. The lender will order an appraisal to get a current value of your home. As a consequence, regardless of what you think your home is worth or how much you currently owe on your mortgage, the lender will want a current appraisal. Moreover, the homeowner generally pays the fee for the appraisal.
• Wait for the closing. Approximately three days before the closing of the loan, you will be given a Closing Disclosure that outlines all the details of the loan. Therefore, you will not be surprised on closing day.
• Sign all the final documents. Whether you apply at your local lending institution or online, you’ll meet with your lender in person to sign the final loan documents. Therefore, it’s generally at this time that you have access to your funds.
• Get your money. Once the loan is complete, you can begin spending the funds.
Often, home loans and equity loans seem to take a long time to complete. If you applied online, you may be able to track your progress. When you apply online, you have to set up an account with the lender. This account allows to access and track the process of the loan application. A benefit of this is that you know where they are in the process Apart from that, you can also learn if there is something additional that you need to do to speed things along.
How Does Repayment Work?
Repayment of the loan will depend on the type of loan itself. On the standard home equity, your payments will be based on the amount borrowed, the interest rate, and the term of the loan. You’ll know what your payments are at the time you get the loan. This online calculator can be helpful to determine payments.
If you got the HELOC, your payments will be different. The reason is that you are only making payments on the amount you actually borrowed. Additionally, you’re only making interest payments until you’ve used up all the money available to you.
Say, for instance, that you’re eligible to borrow $40,000 on the HELOC but only need $10,000 now. You would make monthly interest payments on just the $10,000 and not the entire $40,000. Once all the money is used up, the HELOC is converted to a traditional mortgage.
FAQ We Know You Have
Q. Can I deduct the interest I pay on my equity loan on my income tax?
A. Yes, you can deduct the interest just as you would with your regular mortgage. This is one reason why these loans are so popular.
Q. What type of interest will this loan have?
A. The interest rates vary depending on the lender, your credit scores, and the loan terms. However, the rates are lower than you with consumer loans or credit cards.
Q. Can I really use the money for anything I want?
A. Yes, you can use the money however you see fit. The lender’s only concern is that you have equity in your home and that you pay back the loan.
Q. How do I know what my payments will be?
A. Your payment depends on the amount borrowed, the loan term, and your interest rate.
The home equity loan is a great way to get the cash you need and fast. You can use it for medical expenses, college tuition, vacation, or just to get some extra cash. For all you’ve put into your home, equity loans are a good way to get something back out of it!
Hopefully, this article has given you all the information you need. Moreover, it has answers to any questions you may have regarding the popular home equity loan. If you still have concerns, this is the place to get the information so you can start getting that extra cash you’ve been wanting for so long! Write to us in the commentary section below!