Everything You Need to Know About Home Equity Loans

Posted by Brent on November 7, 2016

You may have heard about home equity loans, but aren’t familiar with all the ins and outs. There is a lot of confusing information out there, so let’s try to give you an overview of the home equity market and what opportunities exist for you.

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What is a home equity loan?

A home equity loan is exactly that, a loan taken against the equity in your home. As you pay principal on your home mortgage, you begin building equity. It is important to note that you are securing a home equity loan with your home as collateral, so if you fail to pay it off you can lose your home in foreclosure.

Why should I use a home equity loan?

A home equity loan can be an advantage for many borrowers. Home equity interest rates are much lower than unsecured loans using credit cards or personal loans. There are advantages for tax purposes as most home equity loans can be deducted from taxes. In addition, you may find low or no closing costs for obtaining a home equity loan.

How do I qualify for a home equity loan?

You need three things to obtain a home equity loan; an acceptable credit rating, existing equity in your home, and income to repay the loan. There will always be a balance of the three, but you must have adequate existing equity plus a cushion above the loan amount you are requesting. Your credit rating can vary somewhat, but lower credit ratings probably will not qualify. As well as income, lenders will also want to see figures on your outstanding debt, since debt-to-income is important. If you have a lot of other debt you may not qualify, even if you have existing equity.

What types of home equity loans are out there?

There are two types of home equity loans, each with different advantages:

  • A standard home equity loan is established for a set amount of finances. You agree to repayment terms and an interest rate, and you get the money for your use.
  • A home equity line of credit (HELOC) establishes a virtual investment based on the existing equity, credit rating, and debt-to-income ratio. Once agreed to, you don’t pay anything on the HELOC until you borrow against it, up to the limit established by the lender.

If you need a lump sum for some project or purpose, a standard equity loan is probably your best choice. If you are doing renovations to your home, and expect to have recurring expenses for materials or labor over a period of time, an HELOC may be your best bet.

Also keep in mind that an HELOC payment is different from a standard home equity loan. An HELOC is typically established as having a draw period, perhaps 2-10 years, where you can borrow against it. During that period you may only pay interest on any accrued debt. After the draw period is complete, there is a payment period of a number of years where you pay off whatever you have borrowed against the HELOC. Consult your lender for details.

In summary

Home equity loans don’t normally have restrictions on how they are used, so you can borrow your home equity for nearly any purpose. Interest rates are lower than personal loans, but you must keep in mind you are borrowing against your home. Make sure you have adequate ongoing income to repay the loan so you don’t lose the home.

AHL Hard Money Network is another option for obtaining money against your home’s equity. If you have less than ideal credit you may not qualify for a conventional home equity loan. Our Gainesville Hard Money Investors are ready to assist homeowners who need money quickly and have the equity to secure a loan. Contact us today for a consultation about your money needs.

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