If you are researching different types of loans, specifically home equity loans – here is what you need to know about them. If you are thinking of making home improvements, going on a much-needed vacation, or even consolidating your debt, getting a home equity loan may be the answer.
What is home equity?
Home equity is the current value of your home minus any outstanding loans i.e., your mortgage.
It is how much of your home you own, with the rest being how much the bank owns. So, as you are paying off your mortgage, your home equity increases.
What is a home equity loan?
It is a type of loan that allows you to borrow money from your home’s equity. When you get a home equity loan, you use your home as collateral. If you, by any chance, fall behind on payments, your lender may be able to seize your assets.
The specific amount you can borrow may vary, but there is usually a limit to a certain percentage of your home equity that you can borrow. It means that the more equity you have, the more you can borrow.
It is also referred to as a second mortgage because your property secures the debt. When you receive the loan, you will get a single lump sum, and you will start repaying it at a fixed home equity rate.
How does a home equity loan work?
If you are looking for money for home improvements or consolidating your debt, entering a home equity loan process, and receiving the loan may seem like a good choice. This can be a great financial tool for you. If you are considering taking a home equity loan, pay attention to the following:
- Build equity– increasing your equity is important. You can do it by repaying your mortgage or making specific improvements to your property to increase its value.
- Calculate the equity– determine your mortgage loan balance and subtract it from your property’s value.
- Make a pros and cons list– before deciding to take this type of a loan, look at all the advantages and disadvantages and consider other options as well.
- Determine if you qualify- lenders typically require at least 20 percent of equity, a minimum credit score, and debt-to-income ratio.
Pros and cons of a home equity loan
Home equity loans can be an excellent tool for making home improvements, consolidating your debt, or any other purpose where you need a large sum of money. Some of the benefits of this kind of loan are:
- Lower interest rates– These loans are secured by your property; the interest rates are lower than those of other unsecured loans.
- Tax– The 2017 Tax Cuts and Jobs Act allows homeowners to deduct the mortgage interest on home equity loans that are used for capital improvements.
Some of the disadvantages of home equity loans are:
- Borrowing costs– some lenders may charge you certain fees so pay attention to these when shopping for lenders.
- Losing your home– if you fail to make monthly payments or if home values in your area plummet, you may end up losing your house or end up owing more than your home is worth.
- Waste money– you should use the funds from the loan to renovate your property, so its value is increased, or pay for college, consolidate high-interest debt, or start a business, which will pay you back.
When it comes to borrowing money at Prudential Bank, you can borrow up to 80% of your home value. We have a variety of terms and rates.
After you’ve read ‘Home equity loans – what you need to know,’ it’s time to contact us for details, and we will provide you with all the information you need to know about a home equity loan process. Please make sure you consult a tax advisor for further information regarding tax benefits. NMLS #518005.