A house is one of the biggest assets an individual owns. Whether it’s a small apartment or a huge mansion, it plays a critical role in a person’s life. And as house prices continue to increase, home equity is becoming a more appealing and accessible source of cash.
Home Equity Loan: The What And How
Home equity loans are a convenient way to utilize your home’s equity and acquire funds when your assets are all tied up in your property. This type of loan is often called a second mortgage and is usually offered at a lower interest than other kinds of consumer loans. This is because, like your primary mortgage, it is secured through your home.
A home equity loan offers borrowers large, lump-sum money that should be paid back in set installments over a fixed period. This is a fixed-rate loan, so the interest rate stays the same throughout the loan term.
Check out these tips to follow for getting a home equity loan:
- Determine Your Budget
First, you need to determine how much you can repay monthly. The amount of money you qualify for might be more than you need and not within your budget. Ensure that all your dues still fit within your current budget to account for the unanticipated events that could impact your income.
In general, your monthly loan payment should be no more than your monthly income minus your living expenses and any debt that you might need to repay.
Also, you need to consider your loan term. If possible, go for a shorter loan term. Longer loan terms will cause higher monthly payments due to the increased total costs and interest costs over the duration of your loan. Plus, a shorter loan term allows you to pay off your debt faster.
- Choose A Good Lender
Choosing a good lender will require you to do some research. Make sure to compare different lenders’ loan and fee structures to get the best loan terms and interest rates.
Lenders also have different requirements for qualifications as well as the terms for home equity loans. Some credit unions offer specific terms. For instance, Empower Federal Credit Union’s offer is different from another. While the former extends a 3.74% annual percentage rate (APR) for their 60-month loan term, some offer higher interest rates of up to 4%.
You also need to review the Loan Estimate forms from each lender. This should give you a rundown of the terms of your sample home equity loan, including the interest rate, and a list of the closing costs and other fees you will be charged with.
- Look At Mortgage Rates
If you want to predict home equity, look at mortgage rates.
When mortgage rates increase and refinancing is no longer a sound option, that’s when home equity products emerge as a prime method to get home equity. Now, even when home equity rates look more favorable than refinance rates, this kind of lending comes with more complexity.
However, mortgage rates reflect the rates on home equity loan products. So, if it makes sense for you and you can get one now, then you will probably save more on interest.
- Have A Good Credit Score
To qualify for a home equity loan, you must have a minimum credit score of about 620, or above 700 for more favorable pricing terms. Meanwhile, scores under 600 can make it difficult to secure a home equity loan. Still, a good relationship with a bank may help you achieve your desired terms.
In case your credit score isn’t looking good at the moment, make sure to pay your other loans on time and if possible, in full, while decreasing your credit utilization. These are the major factors used to evaluate your creditworthiness, thus, staying on top of both can help you now and in the long run.
- Consider Other Alternatives
You do have several other options besides personal loans and credit cards if a home equity loan doesn’t fit your needs.
- Reverse Mortgages: These are tailor-made mortgages for senior homeowners, especially those who have paid off their homes.
- Cash-Out Refinancing: This means replacing your mortgage with another that pays off that existing mortgage while giving you extra cash.
While home equity loans offer you instant cash, you have to consider carefully whether it’s the right financing option for you. Since your home will be on the line, you may risk a lot more than you currently own. Ensure that the purpose and timing are right before borrowing against your home. Remember that every decision-making process should not be rushed, and it must be backed by proper research and opinions from experts.