A home equity loan is simply one way to tap into your home’s value
And of course without having to put it up for sale. That sound great and it’s what most people will definitely want to embark on and try out.
Therefore, as you pay off your mortgage and the property’s value increases over time, the portion of the house that you actually own (also known as your equity) increases. You can turn that equity back into debt in return for money by taking out a home equity loan.
Homeowners of course definitely who want to undertake any sort of home repair project frequently choose home equity loans.
Although you are free to spend your money however you see fit, it is advised that you save it for costs that increase wealth, such as home improvements that will increase the value of your home.
Failure to repaying an equity loan could result in the foreclosure of your house, which serves as the collateral for the loan. Here are some things to consider before applying for a home equity loan.
Meaning of home equity loan?
Take note that a home equity loan allows you to tap into some of your home’s equity for cash, which you receive in the form of a lump-sum payment that you pay back at a fixed interest rate over an agreed period of time. This is typically between five and 20 years, though some lenders offer terms as long as 30 years.
And now many lenders will require you to have at least 20% equity in your home, though some will allow you to borrow over 90% of the value of your home.
Then according to the National Association of Realtors, experienced homeowners made an average down payment of 17% last year, making them eligible for a home equity loan with many lenders almost immediately after closing. First-time home buyers may have to choose from a smaller pool of lenders with higher combined loan-to-value or CLTV limits, having made an average down payment of 6%.
Then steadily paying down your mortgage is one way to grow your home equity. If real estate values have risen in your area since you purchased your home, your equity may be growing even faster.
Base on property data provider CoreLogic, homeowners with mortgages across the U.S. saw an increase of nearly 16% in their equity year over year in 2022. This means that even homeowners who made small down payments or who have only owned their home for a few years may already be eligible for a home equity loan.
How exactly does a home equity loan work?
Home equity loans are commonly known as “second liens” or “second mortgages,” and act as just that: They finance a portion of the total value of the home, with the property acting as collateral. This has benefits and drawbacks for you as a homeowner.
You’ll likely qualify for a better rate with a home equity loan than you would with a loan that isn’t secured by an asset, but you’re also exposing yourself to risk because the lender can foreclose on your home if you can’t make your payments.
Then now if you’re interested in a home equity loan, the first thing you’ll have to do is figure out how much you need to borrow. Unlike a home equity line of credit or HELOC which allows you to draw from a line of credit as needed, home equity loans require you to have a real sense of what your project is going to cost upfront. Once you know how much you’ll need, you’ll want to calculate the value of your equity relative to the value of the home.