Home equity loans have become increasingly popular in the past few years. With property values rising, more people have realized the benefits. They allow you to borrow a certain amount of money, using your home’s equity as collateral. Collateral is property offered to a lender as security for the loan. Home equity loans may seem complicated but they are actually quite simple.
What is a Home Equity Loan?
A home equity loan is a second loan on your property that gives you money based on the amount of equity in your property. Most people use it for home improvements, debt consolidation, college educations, vacations or car purchases. The interest that you pay on your home equity loan is typically tax deductible-and that is a huge benefit to this loan. Consult your tax advisor regarding the deductibility of home equity loan interest.
What’s the difference between Home Equity Loans and Lines of Credit?
There are two ways a lender can loan you money based on your home’s equity. First is a home equity loan which is based on a set loan amount, and second is a home equity line of credit, also known as a HELOC, which is a revolving line of credit. Both are referred to as second mortgages, because they are secured by your property, behind your first mortgage. With home equity loans, you apply for a set loan amount and pay it down based on a fixed interest rate. The relationship between your loan amount and your home’s appraised value is called the “loan-to-value” ratio, or “LTV”. As LTVs increase, the interest rate of the loan in question usually increases as well. (“Home Equity FAQs”). The maximum amount the lender loans is partially determined by this ratio. The maximum LTV varies per lender. Note that if the LTV is too high, it could affect your approval, interest rate or conditions due to the increased risk for the lender.
Can I get an equity loan on my rental property?
Home equity loans can be taken out on primary residences, second homes, investment properties and vacation homes. However, each property has individual conditions for approval. If you have difficulty providing all the income documents necessary for the loan, you can apply under special loan programs such as stated income, “no doc” or “low-doc.”
Can you refinance your mortgage with a home equity loan?
If the interest rate or mortgage payment on any property is too high, a home equity loan is also a good way to refinance your existing mortgage loan, take some additional cash and make one easy monthly payment (“Home Equity FAQs”). No Cash-Out refinancing reduces your monthly mortgage payment and the remaining term of your loan. Cash back refinancing allows you to borrow money in excess of what you currently owed on your mortgage. Cash back refinancing is a smart decision if you have future expenses that will need financing. The interest rates will likely be lower than your credit cards or car loan, and again, the interest you pay can be tax-deductible.
Refinancing with a home equity loan is similar to refinancing with a traditional mortgage. The main difference is that equity loans are typically repaid in a shorter time than first mortgages. Traditional mortgages are usually repaid over 30 years. Equity loans often have a 15-year repayment period, although it might be as short as five or as long as 30 years (“Home Equity Credit Lines”).
When you need money, obtaining a home equity loan not only simplifies your life, it also saves you money.
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