Home equity loans allow you to tap into your home’s equity for almost anything you like. You can use a home equity loan to pay for education, home renovations, a down payment on a second home, medical bills and more.
What Is a Home Equity Loan?
For many people, their home is their largest asset, but it is not a liquid one. A home equity loan allows you to convert your equity into money you can use towards almost anything you like. Your home’s equity refers to the amount of your home which you own and which is not encumbered by a mortgage. For example, if you own a home that is worth $300,000 and you have a mortgage of $100,000 on that home, your home equity is $200,000. With a home equity loan, you borrow a part of your home’s equity. Without touching the primary mortgage, you get a second loan in one lump sum. This type of financing is a fixed rate. While your mortgage payment and interest stay the same for the entire length of the loan, you are still responsible for the payment made for the home equity loan.
How Does a Home Equity Loan Work?
A home equity loan requires you to have a property and equity on it. You can apply for a home equity loan at Assurance Financial by contacting one of our experienced loan officers or by applying online with our virtual assistant Abby. Once you have applied, a lender examines the debts you have, the equity in your home and your ability to repay the loan.
In general, you may be able to borrow up to 80% of the value of your property, minus what you owe on the home loan. Some lenders allow you to borrow slightly more. If you have a home worth $400,000 and your mortgage on that property is $100,000, you may be able to borrow up to $220,000. Unlike a home equity line of credit, a home equity loan is a closed loan. This means you make monthly payments after getting one lump sum. Once the term is over and all your payments have been made, the loan is paid off.
Home equity loans use your home as collateral, meaning the lender has a reduced risk of foreclosure. For this reason, requirements for this type of loan may be more relaxed and interest rates can be lower than with other types of financing.
How Do Home Improvement Loans Work?
Sometimes, home equity loans are called home improvement loans. Most loans marketed this way rely on your home’s equity to help you pay for your renovations. Home equity loans are one good way to finance renovations since most renovations are one-time payments with relatively fixed costs. This type of financing allows you to pay off the repairs and pay off the loan.
In addition, home improvement loan rates tend to be better than personal loan interest rates, which makes them attractive to homeowners. Finally, using home equity for home repairs can make sense since you are improving your home’s value as you complete repairs. This can mean you boost equity even as you use part of it to finance the renovations.
Home Equity Loan Requirements
To get this type of financing, you must own your property, and you must meet equity requirements. This means what you owe on your home loan is less than the amount the property is worth. In general, your home equity must be at least 15% to 20% of your home’s value. Your home’s value will be determined by an appraisal. You must also have a credit score of at least 620, usually, to qualify.
Higher credit scores are more helpful than the bare minimum, however. They increase your chances of getting a mortgage and securing good home equity loan rates. In addition to these requirements, most lenders want to see a debt-to-income ratio (DTI) of at least 43% to 50%. They also want evidence you can repay the loan, so being able to show steady, reliable income is important.
How to Get a Home Equity Loan
To get a home equity loan, you will need to apply. With Assurance Financial you can apply by reaching out to a local loan officer or you can apply for a rate quote in just 15 minutes with our virtual assistant Abby. Once you have applied, the lender will examine the documents and financial details of your situation.
After they have confirmed the home’s value and the amount of debt on the property, they can offer you a home loan of a specific amount. After that, you can sign the paperwork with a notary, just as you would with any mortgage. Before going through this process, you may wish to consider whether an equity loan is right for you.
This type of financing comes with many benefits. The fixed rates make it easy to repay your loan without payments increasing and the interest rate is lower than a credit card, personal loan or other unsecured debt. Furthermore, a home equity loan has faster closes when compared with traditional mortgages or a cash-out refinance. Unlike refinancing your mortgage, an equity loan does not require you to give up any low-interest rate you may have secured.
However, there are a few things you may wish to consider before getting this type of loan. You will be increasing your debt amount and will need to pay this loan in addition to your mortgage. Additionally, if you are using the money over time, you will still be paying interest on the whole amount from the first month. Home equity loans are also not as flexible as home equity lines of credit, which allow you to take out the money you want and repay it as you like. Since you are using your home’s equity as collateral, you could risk foreclosure if you do not pay. A final point of consideration is that taking out this financing reduces equity in your home, making it unavailable for other uses.
Speak With a Loan Officer Near You Today
If a lower-interest home equity loan is right for you, Assurance Financial loan officers work to offer you honest, transparent financing solutions. As an independent lender, we offer a variety of mortgage solutions. With Assurance Financial, you’re in good hands.
At Assurance Financial, we’re the people people, with team members who are willing to guide you to the right financing tailored to the right stage of your homeowner journey. Whether you are in your first home, want to buy a vacation or second home or want to renovate your current property, we can guide you to the home loan that suit your needs.
With end-to-end processing of your home loan under one roof and the latest in application technology, Assurance Financial makes it easy to apply for a home loan. We even offer free rate quotes and pre-qualification so you can find out whether you qualify fast. As an independent, full-service mortgage banker, Assurance Financial is dedicated to the American dream of homeownership. We are a Fannie Mae seller, Freddie Mac servicer approved and Ginnie Mae issuer approved.