Home Equity Loans: How to get a Home Equity Loan

If you are planning to hit the market or already in the market for a loan, a home equity loan is one of several available options that you may want to consider. But, before making a decision or considering a home equity loan, you should weigh carefully the costs of getting it against the benefits. While there are moreover a hundred of companies that provide this type of loan, you should conduct a thorough research and shop for the best home equity loan that meet your borrowing objectives without posing undue financial risks. And remember, if you fail to repay the amounts you’ve borrowed, plus the interest, that could just mean losing your home.


How to get a Home Equity Loan: What is a Home Equity Loan?

This is a loan type that allows you to borrow funds against the value stored in your home. Home equity loan can be useful for borrowing large amounts of money, and they’re easier to get or qualify for as compared to other types of loans because they are secured by your house as collateral.

A home equity loan is also considered a second mortgage and is based upon the equity in your home, or the difference between market appraisal value and any existing mortgage loans against the house. A home equity loan is given in a lump sum and used for major expenses, such as consolidating debt, medical bills, paying for college, or major home improvements. Since houses, like all assets, constantly vary with market appraise value, the amount of equity in a home constantly change. This loan usually has a fixed term of repayment and a higher interest rate compared to a mortgage loan, but the home equity loan rates are lower than the rates on other loans and credit cards, and payments are often tax-deductible.If you're considering a home equity loan, you'll have to determine the equity of your home and search the market for a reputable lender who will offer you a fair, affordable home equity loan rates.

A home equity loan is considered a second mortgage loan with the “first” mortgage loan being the loan you used to purchase your home. You can use the home to borrow additional funds if you have built up enough equity.

With a home equity loan, you will be approved only for a specific amount of equity. Many home equity loan lenders set the equity limit on a home equity loan by taking a percentage, usually 80% of the home’s appraised value and subtracting from that the balance owed on the existing mortgage (if any).

Consider an example where the appraised value of home $100,000. If the credit limit is 80%. Then the total credit worthiness will be 80% of $100,000 which is $80,000. This means that, the lender will be willing to loan a total of $80,000 against your house as the collateral. If you still have a “first” mortgage loan on this house worth $20,000, this mortgage loan will be deducted from this amount. Therefore, the potential home equity loan would be $60,000

In determining your actual home equity limit, the lender will also have to consider your ability to repay the home equity loan, principal and interest, by looking at your credit history, debts, income, and other financial obligations.

Once approved for a home equity loan, you will most likely be provided with the total amount as a block sum. This is on like a home equity line of credit, where you are allowed to a draw period during which you can make multiple draws or borrow up to your credit limit whenever you want.


How to get a Home Equity Loan:Things to Consider When shopping for a Home Equity Loan

Once you have resolved to apply for a home equity loan, the next step is to search for the best home equity loan lender that meets your particular needs or objectives. Read the credit agreement carefully, and consider the conditions and the terms of various firms, including the costs of establishing the loan and the annual percentage rate (APR). Remember, that the APR for a home equity loan is based on the interest rate alone. It does not reflect or include other fees and charges such as closing costs. Therefore, make sure you take a proper consideration of these costs among lenders, as well as the APR rates.


How to get a Home Equity Loan: How a Home Equity Loan Works

Once you get approved for a home equity loan, you can use one of two options to collect the funds:

Lump-sum: This is the option whereby you take the total sum of the loan and repay it over time with fixed monthly payments. Your home equity interest rates can be set up-front, and each monthly payment goes to reduce the loan principal and covers some of the interest cost. This is considered a type of amortizing loan.

Line of credit: This is the option whereby you get approved for a maximum amount available, but instead of taking the lump-sum, you instead get a line where you draw only what you need. It is also known as a home equity line of credit (HELOC). This option allows you to make multiple draws of the approved amount, over a determine period (draw period), and make smaller payments for several years (during your draw period) until you have to start making fully amortizing payments to eliminate the loan.

The home equity line of credit is the most flexible option, as it allows you to only pay interest only on the loan amount that you actually draw. The home equity interest rates on HELOCs are generally variable, thus, your interest costs can change over time. However, your lender has the option to reduce or freeze your line of credit before you’ve had a chance to use money that you need, so that flexibility comes with some added risk.


How to get a Home Equity Loan:Establishing and Maintenance Costs

Most of what you spend as costs or charges of setting up a home equity loan is similar to those you pay when you get a mortgage. These may include:

  • An application fee, which may not be refunded if you are turned down for credit
  • A fee for a house appraisal to estimate the value of your home
  • An upfront charges, such as one or more “points” (1 point equals 1 percent of the loan limit)
  • Closing costs, consisting of fees for title search, attorneys, property and title insurance, mortgage preparation and filing, and taxes.

Also, you may be required to pay certain fees during the loan period, such as a transaction fee every time you draw on the line of credit and an annual membership or maintenance fees. This applies only when you are using a line of credit.

Note that, the cost you pay for your home equity loan application may sum up to hundreds of dollars. And if you are also required to pay other charges such as the transaction fee, this may also sum up, especially if you draw only a small amount against your line of credit such that you carry out multiple transactions, you could find yourself paying thousands of dollars. These charges would substantially increase the cost of the funds borrowed.


How to get a Home Equity Loan: Know the Risks

Before you decide to put your home on the line to consolidate a loan, you must determine what you will be using the loan for. A home equity loan can, and should be used only for major expenses such as medical bills, credit card debt, home repairs and renovations, college tuition, or any other unexpected expenses. Your home equity lender will give you a lump sum of money at a fixed home equity interest rates and definite repayment period. Because this loan is a lump sum, it is best used for a major expense.

However, if you just want some financial security, or need money over time, a home equity line of credit (HELOC) may be a better choice. With a HELOC, you are allowed to withdraw money as you need it and are only required to pay back, plus the interest, only what you actually use.

The most important difference between these two home equity loans is.

  • A home equity loan has a fixed interest rate, while a HELOC has variable interest rates. Your payments could change drastically over time with a HELOC.
  • HELOC is considered a revolving line of credit through a bank or credit card. The monthly payments depend on the current interest rate and what you have actually borrowed.


Your financial situation: Again, home equity loan is a risky adventure, therefore, you have to review your financial situation and be sure you will be able to repay the loan before you borrow against your home. Consider all of your living expenses (such as bills, food, mortgage, car payments, etc.), debt, income, and financial goals. Home equity loans will only be beneficial to you if you are able to pay them back.

If you can’t afford to repay the loan, you may end up in more debt. However, make sure the need is worth the loan and the added interest before deciding on the loan.


Additional costs: Make sure you can also afford the added cost, such as fees and closing costs when you take out your loan. Potential fees include the document preparation, an attorney or title agent, home appraisal charges (if required by the lender), title search, and application. These fees apply to both home equity loans and HELOCs. The HELOC may have some additional fees such as annual membership fees or transaction fees for each time you take out money. Consider talking with your lender about the possibility of waiving a portion or all of the closing costs.

Remember that, a home equity loan is still a mortgage (second mortgage) loan. Thus, the interest rate is likely to be higher than the first mortgage loan, but the closing costs will be lower than your original mortgage.


Know how much home equity you have. You will be able to calculate your home equity by deducting the amount you still owe on the mortgage from the amount your house is worth. Knowing your home equity will give you the confidence to discuss your loan terms with potential lenders.

Keep in mind that market value fluctuates, thus your home equity is not a constant. Also, most lenders expect a maximum loan amount equal to 80% of the market value. This is to say, if the market value is $100,000, lenders typically will loan up to $80,000 maximum.


Decide the amount to borrow. Lenders use a formula to determine the amount of funds to approve. They typically take 75%-80% of your home's market value minus any mortgage loan you might still owe. Some lenders, for certain reasons, may offer to lend you more than the standard range such as lending up to 100% or 125% of your home's market value. However, it’s never advisable to take out a loan that large.

If ever you decide to sell your house, you may need to pay the total left on your home equity loan in a lump-sum immediately sold it.

Loans larger than the market value of your house also come with higher fees and the interest paid on the portion of your loan that is more than the value of your home is not tax deductible either.


Talk to multiple lenders: Shopping around to get the best home equity loan rates are a very import part of your loan process. Your home equity loan must not be through the same lender as your current home loan. Credit unions and banks are a good place to start. Credit unions usually have the best home equity loan rates compare to banks and other types of lenders.

Weigh the home equity loan rates, monthly payments, fees, penalties for missed payments, and the length of the loan terms.

Shopping around is important, but also bear in mind that your first mortgage lender may be willing to give you a better rate because you are a current customer.

Talk about the possibility of waiving or discounts on additional fees and closing costs.


Avoid predatory lenders: Know what you want and be wise about your loan judgment when deciding a lender. Avoid lenders who encourage you to take out more than you can afford (example, giving up to 90% or 100% of your home’s market value), refuse to give you copies of signed documents, pressure you into making an immediate decision, encourage you to lie on your application, orask you to sign paperwork before it has been filled out. These mistakes are costly and may result in you not being able to afford your monthly payments or losing your home to foreclosure.


Apply for the loan. At this moment, you should have enough information to make an informed decision. Once you have shopped around and chosen a lender, it is time to apply for your loan. Make sure you have all the forms, fill them up carefully in good handwriting and preview your paperwork before you sign. Ask your lender for a "Good Faith Estimate." This is expected to be sent within 3 days of you applying for the loan. Ask questions if there is anything that you do not understand.

If required, you can apply for your loan online. Do what you are most comfortable with. While applying for a loan online may be a lot faster, easier and stress free, applying in person will give you an opportunity to talk with someone if you have questions.

If you have any promise from your lender, make sure it’s put in writing.


Close on your loan. Read over your loan documents carefully and make sure you understand the terms of repayment and the home equity loan rates before you sign them. Make sure all of the terms and conditions (interest rate, length of the loan) of the loan match the original agreement. By law, you can review the final loan statement or agreement a day prior to closing.

Never feel pressured to sign your documents and make sure you get a copy of all signed documents before you leave the lender. If anything is not right, do not sign them.


Home equity loan repayment: This depends on the type of loan you get. If you get a lump-sum loan, you’ll typically be expected to make fixed monthly payments until the loan is paid off. With a HELOC, you may be able to make small payments during the “draw period” (usually the interest only). Once the draw period ends, you’ll be expected to make regular payments to pay off the debt. However, it’s also possible to pay off either type of loan early to save money.


How to get a Home Equity Loan: Finding the Best Home Equity Loans

The best home equity loans can help you save thousands of dollars. Finding them will mean:

  • Shop around. Search for a variety of lenders (banks, credit unions, mortgage brokers, and online lenders).
  • Build up a good credit score and make sure your credit reports are accurate.
  • Get friends and family to recommend some good lenders.
  • Compare your offers to those found in advertisements and the websites.


How to get a Home Equity Loan:Benefits of Home Equity Loans

Getting a loan may not seem a wise financial decision on the surface, however; home equity loans offer a variety of financial benefits to borrowers. Most lenders make funds are available just after a maximum of four working days after you sign your loan documents. This fund is put at your disposal during the entire draw period of your loan, thus, you can access if at will or even transfer funds.

Large amounts 

Home equity loans usually run from hundreds of thousands to millions US dollars. This is true especially if you have a significant equity in the home.

Debt Consolidation

By using a home equity loan to pay off higher-interest debts, you may be able to pay off the debt more slowly without struggling merely to keep up with rising interest charges. And while home equity loans typically carry higher interest rates as compare to an original mortgage loan, the rates are generally much lower than those charged by credit card providers and short-term personal loan companies.


Tax Deductible

The IRS regulations allow borrowers to claim the interest paid on a home equity loans as a tax deduction. The size of your home equity loan must be less than $50,000 ($100,000 for married couples filing jointly) to qualify. This is not true for other forms of revolving credit, such as credit cards, which do not allow borrowers to receive a tax break on their interest charges.


Better Credit

When you start making payments on your home equity loan, the account will appear on your credit report. According to the most lenders, the most prominent factor that influences your credit scores is your payment history with creditors. By making timely payments on your home equity loan, you can increase your credit score.


Low closing costs

Most lenders charge a low closing cost on the home equity loans. Some lenders may even waive them altogether, particularly if you have good credit score (if you keep a good faith with your loan payments).

Low interest rates

Home equity loans typically have a lower interest rate. Because they're secured by your home equity, the best home equity loan rates are lower than most unsecured loans such as personal loans and credit cards. And as an adjustable-rate loans (HELOC), they can give you a lower rate than a standard home equity loan. However, these rates can vary over time.

No restrictions on use of funds

When you get approval for a home equity line of credit, how you use it is solely a matter of your preference or needs. You are not required to justify your plans for using your loans as it’s the case with most other types of loans. However, you most play with caution in the way you use your HELOC loans since you're backing them up with your house.

Repayment freedom

Most home equity loan lenders give you the privilege to decide your payment choice. For example, if you need a short-term loan, to pay your taxes while you’re waiting for some money to come in, you could take a draw on your home equity line of credit, settle interest for a short term, and later pay off the balance once you receive your funds.


Home equity loans are typically easier to qualify for, even when you have bad credit.

Safe for lenders

Lender also share all the benefits mentioned above (except for the tax deduction). For these reasons, home equity loan isconsidered one of the best loan types even to the lenders. There are generally safe loans banks to make: to make: the loan is "secured" with your home as collateral.

By security we mean, if the borrower fail to repay, the lender reserve the right to a foreclosure. That is, he can take the property (your home in this case), sell it, and recover any unpaid funds.


How to get a Home Equity Loan: Pitfalls of Home Equity Loans

Before you decide to embrace a home equity loan, you should be aware of the risks of involves. While a home equity loan may provide you with a good number of benefits, there are some risks with this loan type. Most disturbing of all is the fact that your home will be on the line if you don't repay the loan. Some lenders may also prevent you from renting the home, thereby limiting your possible source of income. Para venture, you’re unable to make your payments due to some changes (material change) to your financial circumstances, and your lenders may be forced to foreclose without any notice. This may land you with no money at your disposal and with an impending loan to pay. If you use a home equity loan to pay off other debts, there is a more change that you will still need funds to pay off the home equity loan. This will only mean drowning yourself into deeper debts. 

Because home equity loans can provide you with a lot of cash, it's tempting to use it as an ATM. Make sure to use your home equity loans only for things that will lead to a higher income for your family, add significant value to your life, or improve the value of your home.

Another common pitfall of home equity loans is that fraudsters and scammers have found them a fertile ground to get a lot of cash out or cheat homeowners out of their most valuable asset. Make sure you know who you’re doing dealing with. If you ever smell anything as fishy such as a reluctance to put things in writing or a high-pressure sales pitch, take a step back. Remember that it’s your house that you are using as your collateral and losing it, is a very big price you won’t want to make.


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