What is a home equity loan?
A home equity loan is a type of loan in which the borrower uses the equity of the home as collateral. The loan amount is dictated by the value of the property, which is generally determined by a licensed appraiser, along with the balance on the current mortgage. Home equity loans are often used to finance major expenses such a home repairs, medical bills or college education. A home equity loan creates a lien against the borrower’s house and reduces actual home equity.
What are the two types of home equity loans?
Home equity loans come in two types: A traditional home equity loan (closed end) and a home equity line of credit (open end). Both are referred to as second mortgages because they are secured against the value of the property, just like a traditional mortgage. Both may provide access to large amounts of money.
Which loan type is right for me?
Traditional Home Equity Loan: If funds are for a known major purchase like a home improvement, than taking a lump sum to pay it off immediately makes sense. Monthly payments will start the next month at a consistent rate throughout the term of the loan. These rates are fixed and minimal closing costs apply.
HELOC Loan: If funds are needed for a short period of time and will be repaid quickly, then HELOC makes sense. Funds can be withdrawn and repaid many times during the life of the loan. These rates are variable and there are no set-up costs to you.
What do I need to qualify for a Home Equity Loan?
Home Equity loans require good to excellent credit history and reasonable home loan-to-value ratios.
The loan-to-value ratio can be as high as 90% (mortgage amount + home equity amount divided by the home value).
As with most loans, your income must be verified and your income along with other liabilities will be taken into account to determine your ability to repay the loan in full.
Items to consider with Home Equity Loans
With either a home equity loan or a line of credit, you’re pledging your home as collateral, meaning if you don’t make payments on your loan the bank could pursue legal actions against you and your property. Equity loans and lines of credit often have a repayment period of 10 years. If you sell your house, you have to pay off the balance of the loan before the title can be transferred.