A home equity loan is a way for you to leverage your investment in your home. Property values typically increase over time. So, as you pay down your mortgage and the value of your home goes up, you build equity. This number is calculated as the value of your home (based on current market assessments) minus the amount you owe or any liens. Imagine this number is the section of your home that you actually “own”.
When it comes to borrowing money, you can use this equity to secure a low interest rate or use it as collateral.
Although situations will vary slightly, most lenders will allow you to borrow 80% of the equity you have built up. Using the previous example, your home equity is $200,000 so you would be able to borrow $160,000.
When deciding to borrow against your home, you need to factor in a few extra steps compared to other types of loans. This means the process will take a bit longer as you’ll need a property assessment to discover the current fair market value.
Many people utilize home equity loans for large purchases like
This type of loan can also be used to consolidate high-interest debt or to pay off outstanding property taxes.
There are three ways you can leverage a home equity loan.
Borrowing a lump sum and paying it back over a scheduled time frame.
Allows for flexibility as you can use as much or little of your credit as you need at a time.
Breaking your current mortgage and negotiating for a higher amount. The new mortgage pays off your original mortgage and gives you a sum of cash.
To maximize your home equity loan and get the lowest rates possible, you should ensure your credit score is the best it can be. Check your credit report for any errors that could pull down your score.
If you have overdue bills or your credit cards are maxed out, settle your debts before applying for a home equity loan. You will be rewarded with better rates if you can bump your credit rating from fair to good or good to excellent. This could result in thousands of dollars in savings.