Are you considering different ways to finance an upcoming expense, such as replacing the windows in your home or paying for your child’s college tuition? It’s not uncommon to hear from another homeowner that they are planning to take out a home equity loan, usually in order to pay for something relatively expensive. If you also own property, you’re also likely eligible to borrow money in this form. A home equity loan can certainly be an appealing option for those who need to borrow money, especially considering high-interest alternatives like credit cards or personal loans. If you’re curious and want to know more, read on.
What Is a Home Equity Loan?
A home equity loan, for those who aren’t familiar with the term, is basically like a second mortgage. You already have one mortgage, which was used to buy your home. Some aren’t aware, though, that if you’ve made payments against your loans, you’ve built up equity. And if you’ve built up enough equity, you can place an additional loan against the property. If you apply and are approved for this type of loan, you’ll receive the cash in a lump sum.
This is perhaps one of the features that make home equity loans so appealing—they provide the opportunity to access a large amount of money in a short period of time, which can be tremendously helpful in the case of a large expense. You can use a home equity loan for whatever you need, as the intended purpose doesn’t affect whether you’re approved for the loan. Common uses include investments and retirement income, college tuition, home repairs, remodeling, and debt consolidation.
Other features that make home equity loans an attractive option include the fact that qualifying for one is usually easier than approval for other types of loans because your property provides the security. Another advantage is that home equity loan lenders generally offer a lower interest rate than other types of lenders since there’s actual collateral involved, unlike with a personal loan or a credit card. In other words, it’s a good idea to consider one, especially if you’re planning any upcoming home repairs or renovations. Putting the cost of all the supplies and labor on a credit card would mean much higher interest payments. A home equity loan is particularly useful when there’s something specific that you have in mind to use the money for.
Home Equity vs. Home Equity Line of Credit
Don’t get it confused with the alternative, a home equity line of credit, which is a different type of loan. Unlike a home equity loan, you don’t receive the money from a home equity line of credit in one sum. Rather, you have access to a line of credit. Upon approval, you’ll be able to access funds whenever necessary, for whatever reason, allowing a lot of flexibility.
How Do I Know How Much Equity I Have in My Home?
Home equity, by definition, is the amount difference between your mortgage balance and the current value of your home. This will depend on how long you’ve owned your home and how much equity you’ve already paid into it. A longer period and more monthly payments will translate to a larger potential sum that you’ll be eligible to borrow.
To calculate how much equity you have, take the current appraised value of your home and subtract the outstanding balance remaining on your mortgage. The resulting amount is what you have in equity. Many financial sites offer home equity calculators that will do the math for you.
If you’re curious and want to get estimates of the potential value of your home, real-estate websites such as Zillow can provide a sense of what your property might be worth. You can also see what other similar homes in your general area have sold for, which is often a good indicator of what your home might be worth.
I Have Equity! How Do I Start the Process?
Once you’ve determined the value of your home, you can start thinking about choosing a lender. Before applying for such a loan, it’s important to do your research on home equity loan lenders in your area. It’s a good idea to compare interest rates among financial institutions and see what each lender offers, and make sure you feel comfortable with whoever you choose to work with. Consider comparing three to five different lenders and the rates and terms that each of them offers.
How to Choose the Best Home Equity Lenders
There are certain factors to think about when really choosing the best home equity loan lender for you. Starting close to home is a great option, especially if you already have a good relationship with your current mortgage lender. It offers convenience through familiarity and may offer other benefits for multiple accounts.
Credit unions are an excellent type of financial institution to choose as a lender for your home equity loan, especially if you already are a member of one. If you aren’t, a credit union can offer benefits over a bank or other lender and deserves careful consideration. For example, Rivermark Community Credit Union may allow you to borrow up to 95 percent of your home’s equity, whereas other institutions might only allow up to 80 percent.
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Flexible options are important when considering borrowing a large sum of money since everyone has different means of budgeting and eventually repaying the loan. It’s important to find a lender that offers many types of payment plans so that you can find one that best fits your needs. Credit unions offer a variety of loans, often with 5-, 10-, or 20-year repayment options and no annual fee or prepayment penalties. Using fixed monthly payments, you’ll pay back your loan and also be able to account for this when budgeting.
More Questions?
Once you’ve decided on a credit union or other financial institution and applied, make sure they offer excellent customer service so that you can get the information you need and feel comfortable reaching out with questions.Rivermark Community Credit Union is always available to respond with regards to anything related to home equity loans, so contact us to learn more.
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