Many mortgage lenders are jumping aggressively back into the home equity lending business. After this type of lending was largely shut down in the aftermath of the mortgage meltdown, lenders are once again lending against the equity in people's homes.
National statistics show that new home equity loans and lines of credit increased by more than 30% last year, compared to the previous year. This is still only a fraction of home equity lending that occurred in 2006, but rising home values are putting more equity in borrowers' bottom lines. Of course today home equity loan rates are as low as we have ever seen. If you are a current homeowner and are thinking about tapping your home equity with a home equity loan, did you know the following 4 things?
#1 You Need 10% to 30% Equity to Borrow on Your Home
Equity is how much of the home you actually own, versus what you owe on your mortgage. So, if your home is worth 250k and you owe 200k to the bank, you have 20% equity or $50k. This is often described as a loan to value ratio, which is the remaining mortgage balance compared to the property value. In this case, that would be 80%.
Usually lenders want to see that you have 80% LTV remaining after you take out your home equity loan. So, you will need to own at least 20% of the home before you can qualify. So, if your home is worth 250k, you must have 30% equity, or a loan balance of around 175k, for you to be able to get a $25,000 home equity loan. There
#2 Two Type of Home Equity Loans
The first type i simply called a home equity loan. This is a loan where you just borrow a single, lump sum of money. The other type is a home equity line of credit, or HELOC. This is where the lender allows you to borrow smaller amounts as you need them, up to a maximum amount. The type of home equity loan you use depends upon your needs.
If you want to pay for one major expense, such as a roof replacement, a home equity loan in one lump sum may be best. This can be had in either a 15 year or 30 year loan, fixed or adjustable rate. You must pay for closing costs, but they are much lower than on a full mortgage loan.
If you need money for various projects over time, such as several home improvement projects this year, you might take out a HELOC. You will have a predetermined amount you can borrow in a fixed period of time, usually 10 years. There are not any closing costs, but you do have to pay a fee each year. On the down side, the interest rates are adjustable, so you do not know as certainly what your payment will be. However, when the draw period is over, you may be able to convert it to a fixed rate.
#3 Big Is Better
Home equity loans are not easy to get for small amounts of money; lenders usually do not want to both with loans of less than $10,000. Many large lenders have a minimum loan amount of $25,000. If you do not need that much, you might get a HELOC and just borrow what you need now. You still could be charged the annual fee though. When shopping for a home equity credit line verify whether or not the lender that you are talking to charges an annual fee. Even if you only use part of the line of credit, you must have sufficient equity in your home to borrow it.
#4 It Is a 2nd Mortgage
Many people do not remember that whichever home equity mortgage you choose, it still is a mortgage on your property. It has advantages and disadvantages. A big plus is that the interest that you pay on both mortgages is tax deductible for most Americans. Federal tax law lets you deduct mortgage interest as high as $100,000 on home equity loans.
Also, because the loan is secured by the house, the rates are a lot lower than for unsecured loans, such as credit cards. On the negative side, the debt is secured by the home, so you can lose your home if you do not make the payments. There were many homeowners who lost their homes in the mortgage meltdown because they could no longer make the payments on their second mortgages.
Borrowing your home equity is definitely possible again for many homeowners. Doing so can make great economic sense if you are going to use the money wisely for a major purchase, especially for buying another property that will provide you with a reliable rate of return. It also can make sense from a tax perspective. However, there are risks when you borrow against your home, so you want to be certain that you have the ability to repay your loan.
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