Home Equity Loans

Home Equity Loans

Do you already have an existing mortgage debt? You probably used the mortgage to buy your home, and you need more financing to get more property? Do not worry because you can use your home to get funding if you have built up enough equity. You can get an amount equal to your home’s value, less the amount of outstanding debt on the property (if any).

What is Home Equity Loan?

A home equity loan is a form of a second mortgage. The borrowers use the equity of their existing home as security for the subsequent loans. The first mortgage is the loan used to buy the home you use as collateral. The value of the property determines the home equity amount, and it is a little easier to qualify for than other types of loans. The loan has closing costs.

The loans are mostly used to pay for major projects such as home repairs, medical bills, or college fees. The credit will create a lien against your home used as collateral and reduce its actual equity. To get home equity, you need an excellent credit history, substantial loan-to-value, and cumulative loan-to-value ratios.

The loans can be closed-end, commonly called home equity loan or open-end, home equity line of credit (HELOC)

Benefits of a home equity loan

  • According to the IRS, you can claim a tax deduction if you use the loan to build or improve your home.
  • With a home equity loan secured by your home, you will probably pay less interest than you will be charged on a personal loan.
  • Home equity gives you access to more significant amounts of money, which are also easier to qualify for.

Disadvantages

  • You can quickly lose your home to foreclosure if you do not pay the debt.
  • Unlike a personal loan, you must pay closing costs.
  • Just like it is with a first mortgage, if you sell your home, you must immediately pay off the debt.

Home Equity Loan vs. Home Equity Line of Credit (HELOC)

Home equity loans and home equity lines of credit are often used interchangeably, although they are very different. When you take a home equity loan, you get a fixed amount up front and make fixed monthly payments. The fixed-rate is determined when you borrow, and the interest rate remains constant for the life of the loan. The loan works with an amortization schedule, where the monthly payment you make covers your interest cost and reduces your loan balance.

With HELOC, you do not get a lump sum of cash; instead, there is a maximum amount that you can borrow from whenever you like. The option allows you to acquire several times like credit cards. You can pay back smaller amounts in the early years, but with time you are required to make amortizing monthly payments at a fixed rate to settle the debt. HELOC is more flexible than a home equity loan since it gives you control over your balance and interest rates. Additionally, you are only required to pay interest on the amount you used from the amount of your available money.

The main problem with HELOC is that your lender can decide to freeze your line of credit before you fully utilize the money.  This happens when your home’s value drops or if your lender feels that your financial standing has changed, and you might not be able to pay the credit.

How to Get Home Equity Loans

Apply with various lenders and compare their charges. At Smart Mortgage Center, we will help get loan estimates from multiple sources of your preference, and you will pick the best. The financial bodies will evaluate your credit standing and also do a home appraisal to get the appropriate market value of your home and the amount of equity.

Besides your property, lenders also evaluate and make approval decisions using other factors. You are required to have 15% to 30% equity in your home. You should also have formal secure employment or a stable source of income. Your debt-to-income ratio, housing expense ratio, should not exceed 36%.

How to Get the Best Lender

Different lenders have different loan options. Qualities of the right lender vary from one person to another due to the difference in personal goals and needs. You could be looking for good deals for iffy debt-to-income ratio, or you want excellent customer services. Maybe you want to pay less and want a lender with low on no fees or loan limits and interest rates. Whatever your focus is, at Smart Mortgage Center, we have a team of professionals who will help you shop around for the best home equity loans deal.