When it comes to finding the funds to cover those big expenses, whether it be paying for college, covering home improvements, paying medical bills or taking that dream vacation, the equity in your own home can be a great resource. Understanding the basics of home equity loans can seem overwhelming. Let’s check out the basics to help you better understand and utilize the equity in your home.
First off, what is home equity? Home equity is essentially the difference between the home’s value and the amount owed on any mortgages. It’s what you truly “own” and have interest in.
So what is a home equity loan? Home equity loans are best defined as a loan that you can take out against the value of your home; when you take out a home equity loan, the funds are paid out as one lump sum.
- Interest Rates: Any home equity loan will include a fixed interest rate, meaning your monthly payments will remain the same, offering an easier way to budget around your payments. Your interest paid on your loan may be even tax deductible.
- How to qualify? You have to have available equity in your home to take out a home equity loan. Many lenders can allow borrowers to borrow between 80 and 85 percent of their home’s value minus what they still owe. Other factors that may play a role in your qualification for a loan include your credit score, your credit history, your monthly income, any current debt that you carry, etc. Much of these are the same factors that determine whether or not you qualify for a mortgage.
- Maximum amount: The maximum amount that you’re able to borrow will be calculated by your financial institution.
Home equity loans carry both benefits and disadvantages. Some of the benefits include lower interest rates, tax-deductible interest and larger loan amounts. However, if you aren’t responsible when it comes to making your payements, home equity loans can pose a real threat; these loans are secured with your house being the collateral. In other words, if you don’t repay it, you may lose your home.
“Be sure to use your home equity only for the most important expenses,” Pritchard notes. “Things that will improve the value of your home or improve your income are good examples.”
For other questions about home equity loans or mortgage type questions, please feel free to email me or contact email@example.com
Until next time,