Are you considering to ask for a home equity loan? It could be a great idea if you’re planning to increase the market value of your property, but do you know how it works? Check out this article to get everything straight.
What’s a home equity loan?
It’s not, as many may think, a loan you ask to pay for your home. It’s actually a loan you require for whatever purpose you desire and for which you put your home as collateral. This means that if you fail to repay the loan, you may have your home taken. But before estimating how much money you can borrow, the lender will send an appraiser to ascertain the value of your property.
Types of home equity loans
- Fixed-Rate Loans: In this case, the home equity loan has a fixed interest rate and monthly payment that will stay the same for the lifetime of the loan.
- Home-equity lines of credit: This type of equity loan works exactly like a line of credit, and sometimes it actually comes with a credit card. You basically have a pre-approved loan amount, and you can withdraw from it whenever you feel like it. Monthly payments will vary depending on how much money you borrowed. After the term of the loan is reached, you must repay the outstanding amount.
What are the requirements?
You may still be paying your mortgage, but you’ll need to have at least a 20 percent of equity over your property. So what does that mean? Equity is the value of your home after all debts have been paid. You can calculate your home equity by subtracting any existing property loan debts from your home’s market value.
If, for instance, you’ve paid $50,000 from your $200,000 home, your equity will be of $50,000.
Because you’re borrowing money against your home, credit score requirements are flexible for borrowers with poor credit. However you’ll need to have a considerable equity over your home.
Having a stable income and a consistent employment history of at least two years working for the same employer will no doubt improve your chances of qualifying for a home equity loan. If you’re self-employed, don’t be discouraged, your lender may just request you to provide your tax returns for the last two years.
This refers to the percentage of money paid for debts minus the monthly income. This ratio has to be below 45 percent if you want to be sure to be eligible.
Should I get a home equity loan?
If you’re planning to use the loan to add value to your property, which basically means you’re investing, then it could be a smart move. It wouldn’t be wise, however, to use your home for short-term expenses, like a trip or food.
Before even considering a home equity loan, you must make sure you have a plan B in case your home value or your income decline. Remember that equity is your safety cushion in case all else fails, so using it to ask for a loan is dicey.