A home equity loan which is known as a second mortgage is a loan that its terms depend on your home’s value. Mostly this loan is offered for doing a house repairment or reconstruction.
However, despite mortgage loans, you can use home equity loans to pay other expenses, not related to the house.
In this type of loan, creditors lend you the money based on the equity of your house. If you had borrowed a mortgage loan for buying the home before, the difference of your mortgage loan remained debt, and your house’s equity is considered as a base for the contract. The borrower can spend the money on whatever expenses he or she wants. For example, you can pay a home equity loan on your child’s education. On the other hand, this type of mortgage guarantees the creditor’s risk. Because you agree that your home or whatever property you are getting the loan on it, is the collateral. Although it is an advantage for the lender, it can be a disadvantage for the borrower because you can lose your house if you cannot make the payments.
Home equity loan’s musts:
When borrowing this type of loan, the lender must completely dedicate some essential items, including:
- The amount of money you can borrow
- The type and amount of interest
- Debt’s due time
The amount of money you can borrow depends on your house’s value. Usually, you can get a loan in a value of 80% of your house’s. The type of interest can be fixed or adjustable interest. Typically, home equity loans have fixed interest rates. The interest rate is calculated by considering your credit history. The better your credit history and credit score is, the lower the interests become.
Moreover, be careful about what you are paying for the money. Because sometimes these loans can become tax-deductible.
Often you are required to pay back these loans in some years. Make sure that you can settle your debt in dedicated time. For preventing future disagreements, be aware of the fees of the process. You may be required to pay a document preparation fee, appraisal costs, etc. these fees vary from lender to lender. Search thoroughly and find the best loan under the best conditions. Keep in mind that borrowing a loan is like shopping. So, shop for the best price.
The amount you can borrow:
Creditors consider different factors to specify the amount of money you can borrow. They probably will review your credit score, credit history, your DTI(debt to income) ratio, and the equity of your home.
A debt to income ratio is the ratio of your monthly payments divided by your monthly income. Your credit history on your credit report has adequate information about your payment history.
If everything goes well, you can borrow a maximum amount of 85% of your home’s equity.
Therefore, for acquiring more amount under more manageable conditions, try to improve these items. For example, you can boost your credit score by following some guides. Or you can enhance your home’s equity.
Home equity loan’s repayment:
If you had borrowed a mortgage loan before, you should consider that the payment of this loan adds to the previous payments. Indeed payment is like all other loan settlements. It is calculated by considering the balance(amount of the loan) and the interest rate (the cost of the loan).
Home equity loan best suits you if:
- Your home has adequate equity
This loan is strongly connected to the equity you have built on your home. The more equity there is, the more money you can borrow. Usually, if you make larger downpayment while buying the house, you build better equity.
- You can get the loan with best interest rates
The interest rate and conditions of loan matters, try to improve your eligibility qualification before applying for the loan to pay less interest.
- You can pay the increased monthly payment
When you borrow a new loan, it adds to your monthly payments. Home equity is right for you if you can handle this extra cost.
Other options to borrow money:
HELOC or home equity line of credit is another type of home equity loan. In this kind of loan, again your home is considered as the collateral. You get this loan based on the equity of your house. However, it is more like a credit card than the lone. You are required to pay the amount you spend, not the amount you borrow. Usually, these loans have adjustable interest rates, and the payment can decrease as the principal increases by making payments. However, still, your home is collateral, and the creditor can take it if you are not able to make the payments on time.
- Personal loan
In personal loans, you ought not to use your home as collateral. Therefore you can guarantee not losing your home. However, since the creditor takes a high risk here, the interest rates can be very high.
- Cash-out refinance
Refinancing means that you get a new mortgage loan with a lower interest to pay other loans. Sometimes people use it to change the adjustable interest to a fixed-rate interest. This is one of the ways that you can use to enhance your home’s equity.
If you do not have adequate information to choose the best option for getting extra money, you can contact our specialists and enjoy our free counseling