What Is a Home Equity Loan?

Home Equity Loan

A home equity loan is a special type of mortgage loan some people can use to make larger purchases for home improvements, debt consolidation, and other such reasons. In recent years, this type of home loan has been becoming popular once more, with people much more confident in their homes’ values and the recovery of the housing market.

There are several things you should know about equity loans if you are considering this financing option. First, you will need to have equity in the home. Equity is the value remaining after you take the current fair market value or appraised value of the property and deduct the amount owed on your current mortgage.

For instance, your home is valued at $250,000, and you owe $125,000 on your mortgage. Therefore, you would have $125,000 in equity. However, this does not mean you can tap into the entire available equity, as most lenders want to have a “buffer” to address fluctuations in property values. As such, there can be caps up to 80% of the equity amount you can borrow against.

Lenders will also not cross the 80/20 threshold, in most cases. This threshold is where the loan-to-value ratio is 80% loan to 20% equity. In other words, 20% of $250,000 is $50,000 and, with $125,000 of equity in the home, the maximum amount you may be approved to borrow for an equity loan would be $75,000.

In addition, most lenders have preset amounts required to even be considered for an equity loan. These vary from one lender to the next, so it is best to inquire before filling out and submitting an application. On average, this is $25,000 of borrowable equity. If you need less money or do not have this much available, there may be an alternative solution called a home equity line of credit.

A Home Equity Loan

A home equity line of credit is where you borrow money against your equity as it is needed. For example, your financial institution may issue you special checks you can write whenever you want to borrow against your credit limit. The best way to think of a home equity line of credit is it is like a credit card, but it typically has a much lower interest rate. Again, there can be minimum amounts required to tap into the line of credit, and not all financial institutions offer this program.

The most important thing to remember about an equity loan is that it is still a mortgage against your property. If you sell the home, you are required to pay off the balance owed on your original mortgage and the balance owed on your equity loan before you receive any proceeds from the sale.

Equity loans do offer several benefits, like tax-deductible loan interest, in most places, and easier approvals for people with no-so-good credit because they are using their house as collateral. In addition, most home equity loans at The People’s Federal Credit Union have no closing costs. To learn more about our home loans and equity loans, please feel free to stop by your nearest branch or call us at 806-359-8571 today!

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