What Is Your Best Home Equity Loan Option?
Whether you want to join a buddy on a new business venture, pay off a couple outstanding debts, or renovate your kitchen, a home equity loan can be used for all the above. Unlike a traditional mortgage, a home equity loan is omni-purposed, and easy to qualify for so long as you own a home.
Home Much Equity Do You Have in Your Home?
Your equity is the amount of ownership you have to your home. It is the appraised value of your home, minus the amount you still owe on your mortgage. For example, if your home is appraised at $300,000, and you owe $200,000 in mortgage, your equity is $100,000. Once your mortgage is all paid off, your equity becomes $300,000.
What Type of Loans Can I Get With Home Equity?
There are three options that utilizes your home equity for a loan. They are home equity loans, home equity lines of credit (HELOCs), and cash-out refinance.
Similarities Between Cash-Out Refinance, HELOCs, and Home Equity Loans
Before getting into the differences, all 3 of these options have some similarities. All three generally boast competitive rates when compared to other methods such as credit cards or personal loans. If using these loans towards home improvement, the interest you pay towards the loan each year it can sometimes be used as tax deductions. All three of these loans can also be used for most expenses, if not all. Lastly, the amount you can be approved of for all three of these loans is dependent on your equity, which is calculated with the above method.
Differences Between Home Equity Loans, HELOCs, and Cash-out Refinance
THome equity loans are regarded as the most straightforward of the three options. Submit an application, find out what you qualify for, receive the loan and start making periodic payments until the term ends. It is generally the most favourable type of equity loan for those looking to borrow cash on equity.
HELOCs are what the name suggests – a line of credit. The option offers you a finite source of cash, which you can withdraw from under a given time frame. The amount you withdraw, and the interest charges are all flexible depending on your terms. Instead of receiving a lump sum of the full loan amount, you will gain access to a credit account that contains the maximum limit of your HELOC. As you need the funds, you can transfer those funds into your checking account, write checks from the HELOC account, and for some HELOCs, use a card to access funds.
Throughout this period, whatever amount you withdraw is charged interest. When the period ends, you are required to start paying back both the principal and the interest charges on a regular basis. Some HELOCs may use variable interest rates, which means the rate can fluctuate from time to time, depending on the index being used (prime or LIBOR generally) plus the margin provided with the loan. Given this, monthly payments for Home Equity Lines of Credit can fluctuate depending on the current rate.
Cash-out refinances are similar to a home-equity loan and replaces your existing loan on your home with a new loan and extra cash. Usually, when refinancing, the borrower is either to lower interest rates by shortening their term or prolong their term but also paying higher interest rates. With a cash-out refinance, the new mortgage loan is for more than what you owe on the existing mortgage. The difference between the entire amount of the newly refinanced loan and what you owe on your mortgage is paid to you in a lump sum. One thing to keep in mind with cash-out refinance is that there may be fees with the loan, which may be between 3 and 5 percent of the total loan.
How Much Can You Borrow?
While the aforementioned home equity is the primary factor in the amount you can borrow, other factors such as your credit history, income, debt-to-income ration, and current regulations can come into play.
Once you know how much equity you have, and how much you can likely borrow, consider how you want to use your funds to determine the best type of home equity loan to achieve your goals. For example, if you’re taking on a business venture or renovating a house and are unsure exactly how much money you’ll need, a HELOC might serve as an excellent choice. For other situations where you know exactly how much you’ll need (ie. buying a car), a home equity loan or cash-out refinance would be the best choice.
How Do You Want to Use Your Home Equity?
There are many ways to use the equity in your home. Here are just a few common uses:
- Home improvement and renovations
- Debt consolidation
- Big-ticket purchases
- Starting or funding a business
- Pay for school tuition
- Emergency expenses such as operations
Is a Home Equity Loan Right for You?
1. What Is Your Budget?
Taking out a home equity loan to buy yourself a new car or surprise your wife with something nice can feel great but taking into consideration the repayment process is also important. Consider what the future repayment plan will look like, and whether it will be sustainable and realistic for you.
For most, this starts with evaluating your budget. Let’s say your future monthly repayment will be $1,000 a month. How different is that from your current situation? What does making up for that difference look like?
2. What is Your Current Financial Position?
While your home equity is the primary determinant of how much you can borrow, your financial situation will also influence the type of loan available to you. You want to be sure that you select a home equity loan that matches your borrowing ability and financial position. Typically, the standard borrower should have:
- A credit score of at least 620
- A history of responsible credit use
- Verifiable employment and income
- Applied for a Home Equity Loan
Home equity lending options come in many forms and options. Determining which home equity loan is right for you depends on how much equity you have, your borrowing ability, your budget and how you want to use the money. When considering these factors together, you can more easily see which home loan is the best fit.
If you wish to apply for a home equity loan, or would like to know which option is the best for you, reach out to one of our specialists today! At Leap Financial, we help home owners like you get the best loans for your equity.