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Home equity loan: Cash in on your home equity

Posted on: 26th Mar, 2004 05:19 am
if you wish to utilize your home equity and use it to your advantage, you may consider taking a home equity loan (hel). whether you'd like to consolidate debts, pay for home repairs, make a big purchase or finance your child's education, an equity loan may be the right choice for you.



what is a home equity loan?

equity loan is a fixed rate second mortgage offered against your home equity which is the collateral here. since payments are almost fixed, therefore, you can plan your budget accordingly. however, you may also find equity loans with variable rates and payments.

how do you qualify for a hel?

there are 3 factors that lenders look for in a hel application. the factors given below are:
  • credit history:
  • 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.
  • debt to income ratio:
  • lenders prefer a debt-to-income ratio below 36 percent in order to approve your equity loan.

  • loan to value ratio:
  • 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?

the rates of equity loan are usually higher than that of first mortgages but lower than credit cards and unsecured personal loans. the terms usually range from 10 to 30 years depending upon the loan amount.

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?

you can borrow an amount such that the second mortgage and the first loan balance combined together don't exceed 80% of the equity in your home.
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 – 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?

you need to pay the closing costs which are almost similar to the costs in a second mortgage. some of the costs include that of property appraisal, loan application, title search etc. of course the biggest cost that you'll have to pay is the interest on the loan. you may or may not have to pay the pmi.

what are the tax benefits?

the interest on a home equity loan is deductible but only if you itemize your deductions. know more on how to deduct interest on your taxes.
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 refinance. you may use the cash-out refinance vs 2nd mortgage calculator (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?

these loans offer some distinct benefits to the borrowers. some of these benefits are –

  • 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.


Hi Elaine!

Welcome to forums!

A credit score of 750 is indeed a good one. However, apart from the credit score, the lender will check your income as well as the equity that you've in your property. If you have around 20% equity in your property, then you will be able to refinance your present mortgage.

Feel free to ask if you've further queries.

Sussane
Posted on: 07th Jul, 2010 12:02 am
Hello: I have been preapproved for a loan however, I really don't have a savings so I may not be able to afford the down payment and or closing costs. Are there programs out there or are there other ways to handle this?
Posted on: 10th Oct, 2010 03:03 pm
Hi Lynn,

There are certain down payment assistance programs given by the government of some states. You should speak to your lender and find out if such programs are available in your state. If yes, then you can take advantage of those programs.

Thanks
Posted on: 11th Oct, 2010 01:03 am
i own my mobile home out right but i got bad credit can i still get a home equity loan on my home
Posted on: 06th Jan, 2011 06:38 pm
i live in ga in a mobile home park
Posted on: 06th Jan, 2011 06:39 pm
Hi lean,

As you've a bad credit situation, you won't be able to get a home equity loan. You will have to improve your credit situation first and then look out for loans. You can take a look at the given page in order to know some steps to improve your credit score:
http://www.mortgagefit.com/credit-rating/credit-repair.html
Posted on: 06th Jan, 2011 08:31 pm
Dear Jessica,

We just bought our first home in April and have been making mortgage payments for 6 months. Our family has recently offered us a large sum of money to pay off the loan completely because of the ridiculous interests payment. We are now thinking to buy a second home using the home equity loan as our down payment. Unfortunately, our first home home value has gone down from $275,000 to $225,000 in six months. Although it is a buyer market with a new low on interest rate, is it wise to take on a home equity loan so we can get a bigger home?Can you give us some advise? Thank you!
Posted on: 17th Jan, 2011 01:16 pm
Hi Guest!

Welcome to forums!

If you take out a home equity loan in order to pay off the down payment for the new property, you will be liable for 2 mortgages - one of the old property whereas the other on the new property. If you can afford to pay two mortgages then you can go ahead with it.

Feel free to ask if you've further queries.

Sussane
Posted on: 17th Jan, 2011 09:42 pm
HOW CAN YOU GET A LOAN WHEN YOU OWN YOUR HOME,AND YOU WANT TO PAY OFF SOME LOANS TO FREE UP SOME MONEY,AND DO SOME HOME IMPROVEMENTS TO YOUR HOME BUT ALL YOU GET IS AN ANSWER FROM COMPUTER THAT SAYS NO. DON'T PEOPLE THINK FOR THERE SELFS ANYMORE.. THANKS SARGE
Posted on: 27th Apr, 2011 10:32 am
Hi SARGE,

With a credit score of 526, none of the lenders will be ready to give you a loan. You should have a credit score of around 600 in order to qualify for a FHA loan and a score of 700-720 in order to get a conventional loan. None of the lenders will be ready to offer you a loan if you don't meet this criteria.

Thanks
Posted on: 28th Apr, 2011 12:44 am
hi jessica, in regards to a texas a6. we refinanced a couple of years ago with cash, so now it is an equity loan/mortage. it appears we can refinance the loan again, but no cash out except closing cost, which is fine, but can we refinance with a variable rate instead of a fixed rate?
thanks
Posted on: 27th Mar, 2013 12:38 pm
Hi Micha!

Welcome to the forums!

As far as I know, yes, you will be able to go for a variable rate of interest in case of that loan.

Feel free to ask if you've further queries.

Sussane
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Posted on: 13th Aug, 2013 12:39 am
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Posted on: 13th Aug, 2013 09:21 pm
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