Often you may need money to make the expenses and in such case, you may consider tapping into the equity of your home. In this post, we will discuss home equity loan, how it will work, and also how you can qualify for home equity loan.
What is a home equity loan?
Often home equity loan can be considered as second mortgage as that is truly what it really is. With this loan, you can borrow against the value of your own home. To obtain a large sum of money, people often go for home equity loan.
Home equity loans can be an attractive source to get funds because they are available at much lower interest rate as compared to credit cards or even personal loans. However, you must understand that low-interest rates will come with high risk too.
Your lenders may feel comfortable to offer lower rates as these loans are fully secured by the home, which means the lender can always foreclose on you in case you stop making the payments.
How will it work?
Now let us try to understand how does home equity loan work? It will work almost in the same way as your first mortgage when you initially purchased your house.
All the money from your loan was disbursed as a lump sum and you could start making your fixed monthly payments for paying back the loan.
After each payment, you will always pay down a portion of both principal and interest. Also, home equity loans will come with certain fixed interest rate.
Qualifying for your home equity loan
Qualifying for home equity loan too is quite similar to your first mortgage. The lender will prefer to see your proof of employment, and also records of your assets and debts. You must be ready to bring the following documents with you while visiting your lender.
- Last 2-year’ tax returns, if you are self-employed
- Most recent payslips
- All your bank statements and assets
- Records of debt, credit cards or any other loans
Besides all the above, your lender will see how much equity your home will be worth. Here, based on amount of equity, you can decide how much money you can borrow. Usually, lenders allow 85% of the home equity.
Often, people get confused about this loan with home equity’s line of credit. They are similar and they both will let you borrow based on your home’s value, but they will work much differently.
While your home equity loan will function like any traditional mortgage, your home equity’s line of credit will work as your credit card. It will give you certain period of time and you are allowed to withdraw on the equity of your home, as required.
In your home equity’s lines of credit will also have an adjustable rate of interest.
If you are not too sure which of these two will be right for you, then talk to a current loan officer or financial advisor. They will help you to take more in-depth look for both options to decide which will serve you the best.