Home equity loans allow homeowners to borrow against the equity in their homes. They are popular among borrowers who want to use the funds for home improvement projects or to pay off or consolidate high-interest debt.
What is home equity?
Home equity is the amount of money you would earn if you sold your house and paid off your mortgage. It is calculated by subtracting the amount you owe on your mortgage from the current appraised value of your property. For instance, if your house is appraised at $300,000 and you still owe $100,000 on your mortgage, your home equity is $200,000.
If you made any renovations to your property or if property values have gone up in your area since you last had your home appraised, it might be a good idea to get a new appraisal before applying for equity financing. This way, you can determine if your home has increased in value and you may have more equity to borrow against. As a result, you could have a better chance of getting approved for a loan.
What is a home equity loan?
A home equity loan is a type of financing that uses the equity in your home as collateral. The lender determines the amount they are willing to lend based on the equity you have. However, most lenders do not offer the full amount of equity, as this increases their risk.
If you are approved for the loan, the lender will create a second mortgage and issue you a check for the full loan amount. The repayment process is similar to any other installment loan, where you would make equal monthly payments over time until you pay off the loan balance.
What is a home equity line of credit?
A Home Equity Line of Credit, also known as HELOC, is a type of loan that utilizes your home's equity as collateral. Unlike a traditional loan, a HELOC extends a line of credit based on your equity instead of issuing a lump sum of money.
HELOCs are similar to credit cards in that you have a specific spending limit, and once you reach that limit, your credit stops. The period when you can spend money from your HELOC is called the draw period, which usually lasts between five and ten years. After the draw period ends, you can no longer access the credit, and you enter your repayment period.
How much can you borrow?
Lenders have different policies regarding the percentage of total equity they are willing to lend. Your credit profile also plays a part in determining how much you can borrow. If you have a strong financial profile and an excellent credit score, some lenders may be willing to loan up to 85% or more of your equity.
