What is a home equity line of credit?

What is a home equity line of credit?

A home equity loan is a method of borrowing money for big-ticket items, and understanding the facts about these complicated loans is important to help you make the right decision for your finances.

If you are considering taking out a home equity loan, here are 13 things you need to know first.

What is a home equity loan?

A home equity loan – or HEL – is a loan where the borrower uses their home equity as collateral. This loan allows you to borrow a lump sum amount of money based on the value of your home, determined by an appraiser, and your current equity.

Equity loans are available as fixed or adjustable-rate loans and come with a set amount of time to pay off the debt, usually between 5 and 30 years. You will pay the closing cost, but it will be lower than what you would pay on a typical full mortgage. Fixed-rate HELs also offer fixed interest rate expectations from the start, which the borrower prefers.

What is the best home equity loan for?

Home equity loans are usually best suited for people who need cash to pay for a single major expense, such as a specific home renovation project. Home equity loans are not very useful for borrowing a small amount of money.

Borrowers usually don’t want to be bothered with making a small loan – $ 10,000 is about the smallest you can get. Bank of America, for example, has a minimum equity loan amount of $ 25,000, while Discover offers home equity loans in the range of $ 35,000 to $ 150,000.

What is a home equity line of credit?

A home equity line of credit – or HELOC – is a revolving line of credit that is set based on your home equity. Once the limit is set, you can use your credit card at any time throughout the life of the loan by writing a check against it. A HELOC is similar to a credit card: you don’t have to borrow the full amount of the loan, and the available credit is replenished when you repay it. In fact, you can repay the loan in full during the draw period, re-borrow the entire amount, and repay.

The draw period usually lasts for 10 years and the repayment period usually lasts between 10 and 20 years. You pay interest only on what you actually borrow from an existing loan, and you usually don’t have to repay the loan until after the draw period closes.

HELOC loans also sometimes come with an annual fee. Interest rates on HELOCs are adjustable, and generally, they are tied to the principal rate, although they can often be converted to a fixed-rate after a certain period of time. You are also often asked to pay the cost of closing the loan.

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What is the best home equity loan?

A home equity line of credit is best for people who expect to need varying amounts of money over time – for example, to start a business. If you don’t have to borrow as much as HEL requires, you can choose HELOC and only borrow what you need.

What are the benefits of home equity loans and home equity lines of credit?

Beyond access to large sums of money, another advantage of home equity loans and home equity lines of credit is that the interest you pay is usually taxable for those who deduct the deduction, similar to the interest of a regular mortgage. Federal tax law allows you to reduce mortgage interest by up to $ 100,000 in home equity debt ($ 50,000 per share for married people who file separately). There are certain limitations, though, so check with a tax advisor to determine your own eligibility.

Because HELs and HELOCs are guaranteed by your home, prices also tend to be lower than you would pay on a credit card or other unsecured loan.

What are the disadvantages of home equity loans and home equity lines of credit?

Debts you take out of HEL or HELOC are secured by your home, which means your property may be at risk if you fail to pay your loan payments. You can be predictable and lose your home if you are in arrears on a home equity loan, just like on your primary mortgage. In the case of a foreclosure, the primary mortgage borrower is paid first, and then the home equity borrower is paid out of what is left.

If the value of your home drops, you can go underwater and owe more than the home is worth. Rates for HELs and HELOCs are also a bit higher than what you are currently paying for a full mortgage, and closing costs and other fees can be added.

How do I determine my equity?

If you are interested in learning how to qualify for a home equity loan, you first need to determine how much equity you have.

Equity is the part of your home that you actually own, as opposed to what you still owe to the bank. If your home is worth $ 250,000 and you still owe $ 200,000 on your mortgage, you have $ 50,000 in equity or 20%.

The same information is more often explained in terms of the loan-to-value ratio – i.e. the remaining balance on your loan versus the value of the property – which in this case would be 80% ($ 200,000 becomes 80% of $ 250,000).

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How do I qualify for a home equity loan?

Generally, lenders will require you to have at least a loan-to-value ratio of 80% remaining after the home equity loan is approved. This means you need to own more than 20% of your home before you can qualify for a home equity loan.

Can I get a home equity loan with bad credit?

Many lenders require an excellent credit rating to qualify for a home equity loan. A score of 620 or higher is recommended for a home equity loan, and you may need a higher score to qualify for a home equity credit. However, there are certain situations where home equity loans are still available for those with poor credit if they have large equity in their home and a low debt to income ratio.

If you think you will be in the market for a home equity loan or line of credit in the near future, consider taking steps to improve your credit score first.

How long can I get a home equity loan?

Technically, you can get a home equity loan once you buy a home. However, home equity builds up slowly, which means it can take some time before you have enough equity to qualify for a loan. In fact, it can take five to seven years to start paying the principal on your mortgage and start building equity.

The typical processing time for a home equity loan can be anywhere from two to four weeks.

Can I have some home equity credit?

While it is possible to have a lot of home equity credit, it is rare and some lenders will offer it. You need substantial equity and excellent credit to qualify for various loans or credits.

Applying for two HELOCs at the same time but from different borrowers without disclosing them is considered mortgage fraud.

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What is the best bank for a home equity loan?

Banks, credit unions, mortgage lenders, and brokers all offer home equity loan products. A little research and some spending around will help you determine which banks offer the best home equity products and interest rates for your situation.

Start with a bank where you already have a working relationship, but also ask for referrals from friends and family who have recently gotten a loan, and be sure to ask about any fees. An experienced real estate agent can also provide some insight into this process.

If you’re not sure where to start, here are some options to check:

  • Lending loans work with qualified partners to find the best rates and offer an easy way to compare lending options.
  • Discover offers home equity loans between $ 35,000 and $ 150,000 and makes it easy to apply online. No application fee or cash is required upon closing.
  • Bank of America offers HELOCs of up to $ 1,000,000 at major homes, makes it easy to apply online, and offers fee reductions for existing bank customers, but it has higher debt-to-income ratio requirements than other lenders.
  • Citibank allows you to apply online, by phone, and in-person for both HEL and HELOC. It also waives application fees and closing costs — but it charges an annual fee on the HELOC.
  • Wells Fargo currently only offers HELOCs at a fixed rate, but the bank offers a discount for Wells Fargo account holders, as well as a reduced interest rate if you cover the closing fee.

How to apply for a home equity loan

There are certain equity loan conditions that you must meet before you can apply for a loan. For a better chance of being approved for a loan, follow these five steps:

  • Check your current credit score. A good credit score will make it easy to get a loan. Check your credit report before you apply. If your score is below 620 and you are not desperate for a loan now, you may want to take steps to improve your credit score before you apply.
  • Determine your available equity. Your equity determines how much loan you qualify for. Get a sense of how much your home equity is by checking sites like Zillow to determine the current value and subtract how much you still owe. The appraiser from the lending institution will determine the official value (and therefore of your equity) when you apply, but you can get a good idea of ​​how much equity you have by doing a little personal research first.
  • Check your debt. The debt-to-income ratio will also determine your eligibility for a home equity loan. If you have a lot of debt, you may want to work on paying it off before you apply for a home equity loan.
  • Research rates in different banks and lending institutions. Not all banks and lending institutions require the same rates, fees, or eligibility for loans. Do the research and check multiple borrowers before starting the application process.
  • Gather the necessary information. Applying for a home equity loan or line of credit can be a lengthy process. You can speed things up by gathering the necessary information before you start. Depending on the lending institution you work with, you may need to prepare deeds, pay stubs, tax returns, and more.

If you need a loan to help finance future expenses, make sure you are prepared. See our Loan Learning Center for more resources on the different types of loans available.

Note: It is important to remember that interest rates, fees, and terms for credit cards, loans, and other financial products change frequently. As a result, rates, fees, and conditions for credit cards, loans, and other financial products mentioned in these articles may change since the date of publication. Be sure to confirm current rates, fees, and terms with your bank card issuer, bank, or other financial institution directly.

By aamritri

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