What You Need to Know About a Home Equity Loan

Owning a home has many benefits. Some are physical: you can claim you own piece of land, and you can use its purchase and paying off to improve your credit, amongst other key things. And some are emotional including the pride you feel in owning your own home.

There is an added benefit that only homeowners enjoy and it is perhaps the greatest benefit of all, if utilized smartly and that is you gain the ability to take out a home equity loan.

A home equity loan is a loan you take out against the equity that has accrued in your home. It is a great benefit to many homeowners because life sometimes presents situations where you need large sums of money, and so having an ability to borrow against your home can be a lifesaver.

There are two types of home equity loans one can secure on their property. The first is a standard home-equity loan, where the borrower will secure a lump sum. The second and more popular type of home equity loan is a home equity line of credit, or HELOC. The borrower gets approval for this revolving line of credit that stays open and is replenished as the borrower pays back the loan. Each loan can be best depending on why you need the money.

Home equity loans are typically provided by banks and home mortgage companies, so applying for and receiving one is a similar process to when you took the loan out on your home. In other words it can get pretty complicated and demanding in terms of the types of information that is needed to secure one. If you have a need for a home equity loan, you need to understand those requirements. Here is a list of what is needed:

Equity in Your Home

Many people own homes that are worth millions of dollars and are surprised to find that they cannot secure a home equity loan. In order to get a home equity loan you must have more value in your home than you owe to the bank. Therefore a home of less value can have much more equity than a higher priced home.

In other words if your home’s value is $2 million dollars and you owe $1,950,000 you only have $50,000 or .5% equity. For someone who owns a $300,000 home and only owes $150,000 it will leave $150,000 equity in the home or 50% The finance company will use a formula to gauge whether your are eligible that is based on the percentage of your home that is equity and in the scenario above the second homeowner would apply for the loan if all other criteria is met while the first homeowner would not. For reference sake, finance companies typically look for a loan to value ratio of 80%, meaning what you own 20% of your home, to move forward with a home equity loan.

Your Income Credit and Debt Loan

Although the equity in your home will secure the loan in the event of a default, the finance company will still want to know that you can make monthly payments on your home equity loan. For this reason, your income and credit rating and debt loads will be heavily considered.

Applicants must have an income that can support payments for the amount of money being borrowed. If the income is too low the amount lent may be lessened or the loan may not be approved.

Your credit history and credit score will be a factor in determining whether you qualify for the loan. Higher credit scores will be smiled upon and no derogatory makes on a credit report can mean a better interest rate on the loan.

Finally, your debt load or your current debts as measured as a percentage of your income will be considered. If your debt load is too high, the finance company may ask you to pay off some of your debts before the loan will be issued. If this cannot be accomplished to meet their lending criteria, they will reject your loan.

Home equity loans are typically for borrowing sums of money above $20,000. Most banks will not go below that amount although some finance companies will, but the fees will be very high. Do your research on the intricacies, and you may discover that a home equity loan is perfect for your needs.