Home Equity Loans Information

What Is a Home Equity Loan?

An equity home loan, also referred to as home equity mortgage or loan, is a loan given to a borrower that is based on the equity in a property. Equity is the difference between a home’s value and the amount that is owed on the original mortgage. For example, if a home is worth $200,000 and loans against the property total $150,000, the homeowner has $50,000 in equity on the property. That doesn’t mean a borrower would necessarily have access to the full $50,000 for a loan against the equity. That amount would be determined by a lender’s Loan to Value requirements.

What Is Loan to Value?

Loan to Value or LTV is a percentage of the total loans a lender will approve against the home’s value. Many lenders use an 80% LTV. This means that based on a home with a $200,000 value, an 80% LTV would be $160,000. With $150,000 in existing loans, a borrower could potentially qualify for a $10,000 home equity loan. Keep in mind, the LTV may vary from lender to lender.

How Is a Home’s Value Determined?

Home equity loan rules will generally require an appraisal from a lender appointed appraiser. An appraiser will take into consideration a variety of factors in determining a home’s value including its age, size, construction materials, condition, and location. The real value, however, is what a qualified buyer is willing to pay for a house. That is why appraisers rely heavily on recent sales prices of comparable homes in determining value.

What Are the Benefits of a Home Equity Loan?

Home equity loans are popular because they offer so many benefits to the borrower.

• Lower interest rates. Because home equity financing is secured through the value of a property, lenders will offer them at lower rates than credit cards or other unsecured personal loans. This lower risk for lenders translates into lower rates to the borrower.
• Can be Used for a Variety of Purposes. Unless a home equity loan is specified for home improvements to increase a home’s value, they can generally be used for a variety of purposes like paying off higher interest loans, medical bills, and more. This versatility is a very appealing factor.
• Tax Advantages. A home equity refinances may qualify for up to a 100% tax deduction. Check with your accountant or tax adviser to determine if you would qualify.
• Easier to Qualify. Because a home equity mortgage is considered a secured loan, it is often easier to qualify for than an unsecured loan.

Are There Situations Where a Home Equity Loan Is Not the Best Solution?

While there are many factors that make an equity home loan attractive, in some circumstances, there may be better alternatives. For example, taking out a long-term loan for a short-term need can prove to be expensive over time. There may also be cheaper alternatives than a home equity loan for college education expenses.

What Are Typical Home Equity Loan Requirements?

There are some guidelines and home equity loans rules that home equity loan lenders will take into consideration when qualifying a borrower.

• Borrowers must have equity in a house. The foundation of home equity loans is the equity in a property. As mentioned previously, equity is the difference between a house’s appraised value and the amount that is owed on the property. Keep in mind lenders are not likely to lend an amount equal to the full value of a home.
• Loan to Value (LTV) Ratio. The Loan to Value ratio is the total amount of loans against a property compared to its value. To improve eligibility for a home equity loan, borrowers will want to keep the LTV at 80% or less. For example, if a home is valued at $100,000 and the borrower already owes $60,000 on an original mortgage, they could borrow an additional $20,000 through a home equity loan and keep total loans at 80%.
• Credit history. A borrower’s credit rating and credit history will have the satisfy the home equity loan rules of a particular lender. Late payments and collections will work against a borrower when attempting to qualify for a home equity loan.
• The income of the borrower will be viewed in consideration of their ability to repay a home equity loan mortgage.

What Are Home Equity Loan Terms and How Are They Determined?

Home equity loan terms are the interest rate, length, and payment amounts of the loan. Home equity loan lenders will consider factors like a borrowers credit history, equity, LTV, income, and the wishes of the borrower in determining these terms. While borrowers “wishes” may not impact the rate or equity factors, they can be considered in regards to the length of the loan which will have an effect on payment amounts.

What Other Home Equity Loans Information Should a Borrower Know?

Borrowers should understand that not all home equity loans are the same. Home equity refinance rates can vary in qualifying factors and in interest rates. Even a small rate change can make a significant change in total payments over five to 15 years. Borrowers should also be aware that a home equity loan must be satisfied when the home the loan is attached to is sold.

For those who own a property, especially if it has been owned for any significant amount of time, a home equity loan is often the best option when extra cash is either needed or when it can be used to reduce other higher interest debt.