- What is a home equity loan?
- How do you qualify for a HEL?
- What rates and terms are available?
- How much can you borrow?
- What do you need to pay?
- What are the tax benefits?
- What are the other benefits?
What is a home equity loan?
How do you qualify for a HEL?
- Credit History:
- Debt to Income Ratio:
- Loan to value ratio:
You need to have a decent credit record along with a credit score of 680 and above in order to qualify for an equity loan. Getting an equity loan with bad credit is quite tough especially if the mortgage and housing markets are in a crisis.
Lenders prefer a debt-to-income ratio below 36 percent in order to approve your equity loan.
Lenders would like to keep your total loan-to-value ratio (including first mortgage balance and equity loan) equal to or less than 80% of the home value. So, the first mortgage balance is what they'll consider when they provide an equity loan.
What rates and terms are available?
To know what the equity loan rates are, request for no-obligation free mortgage quote from lenders and then try to compare the costs and total interest you will have to pay for each type of loan offer. You may use the Mortgage Payment Comparison Calculator (given below) to compare how much you need to pay for each offer.
How much can you borrow?
Let's take an example:
Say you've bought a home worth $220,000 and paid $20,000 as the down payment. You've taken a mortgage worth $200,000 on your property. The equity at the time of purchase is equal to the down payment, that is, $20,000.
Let's say after 5 years, your home value has accelerated to $300,000 and you've paid down $15,000 of the principal loan amount. So, you still owe = $200, 000 - $15,000 = $185, 000.
Your equity in the home is then = (Current appraised value â€“ amount you owe) = $300,000 - $185, 000 = $115,000
Now say, if you wish to borrow $50,000 from your equity. Then the combined mortgage balance is = $185000 + 50000 = $235000, less than 80% of your current home value (that is, $240,000). So, the combined LTV is well within 80% of the current appraised value of your home.
However, there are lenders who may offer a loan equal to 125% of the home value. But for that you need to pay higher fees and rates of interest compared to what you'll pay for a traditional HEL.
What do you need to pay?
What are the tax benefits?
Cashing out equity with a fixed rate equity loan makes sense when you stay in the property for a long time. However, for a short term, say, 3-5 years, a Heloc or line of credit may be a better option. If you have enough equity, you may as well as look into the possibility of a cash-out [url=http://www.mortgagefit.com/refinance.html]refinance[/url]. You may use the cash-out refinance vs 2nd [url=http://www.mortgagefit.com/calculators/]mortgage calculator[/url] (given below) to find out which will be better for you. Another option used to leverage equity is the reverse mortgage but that'll be available only if you are aged 62 and above.
What are the other benefits?
- The rate on these loans is relatively low.
- It is comparatively easy to qualify for this loan even with bad credit.
- This offers you the chance to obtain relatively large loans.