What is a home equity loan? Should I get one?
Our homes are often the most important asset we possess for long term financial growth. Our homes are also an asset that we get to experience every single day. Now more than ever, families are looking for ways to improve their home and make sure it is well maintained.
But this can cost money. A lot of money. And unfortunately, the cost of many of the home improvements necessary can cause homeowners to put off necessary repairs or value-added renovations. If you have at least 20% equity in your home, it’s likely that you already have the funds needed to make your house your dream home.
What is a home equity loan?
A home equity loan, which differs from a personal loan or a Home Equity Line of Credit (HELOC), is a large lump sum loan based upon the equity in your home. A home equity loan is paid off at a fixed rate over time. The more equity you have in your home, the more cash you can borrow. We shared in that past that this is the best loan, and we mean it.
With a home equity loan, your lender will let you borrow the difference between 80% of your current home value minus the principal of the existing loan. In other words, if your home is worth $100,000 and your current principal on the mortgage is $70,000, you can borrow up to $10,000 from your equity.
One of the biggest advantages of a home equity loan is the low interest rate. Since these are fixed rate loans, you can borrow a significant lump sum and have a low payoff over time. Although many homeowners use it for major repairs or home improvements/renovations, there are no restrictions on how the funds can be spent.
When should I get one?
To begin with, you have to have at least 20% equity in your home. Not only does this happen by paying down your mortgage, but it is also a result of increasing home values. If you own a home, but don’t have that level of equity, other loans like a home improvement loan, may be a better option.
Also, like any other loan, your credit score will affect the rate.
Once you qualify, consider these circumstances:
- You are planning a major renovation that will improve the value of your home (kitchen, bathroom, adding good square footage)
- You have a major repair
- You need to consolidate high interest loans or credit cards to pay them off faster
A home equity loan is a great option if you want to use the benefits of the equity you have in your home without having to sell it.
If you are ready to get a home equity loan, you can apply now on our website!