What Is A Home Equity Loan?
The home equity loans are referred to by different names like second mortgage, equity loan, home equity instalment loan. This is a kind of consumer debt. The home equity loan is more of an equity mortgage that is given only against a property.
The home equity loan can be taken for any basic or generic purpose. It may be given to you depending on your presentation of residential or non-residential projects. With the help of home equity loans, the borrowers can use any amount of money. However, it is essential to manage the basics depending on the current market value and mortgage balance due. The home equity loans have fixed rates.
If you’re approved, the lender will create a second mortgage and cut you a check for the full loan amount. You can then use this lump sum how you wish and will repay it in equal instalments with interest over time. This can be a good option if you know exactly how much you need to borrow.
How does a home equity loan work?
Home equity loans are commonly known as “second liens” or “second mortgages,” and act as just that: They finance a portion of the total value of the home, with the property acting as collateral. This has benefits and drawbacks for you as a homeowner. You’ll likely qualify for a better rate with a home equity loan than you would with a loan that isn’t secured by an asset, but you’re also exposing yourself to risk because the lender can foreclose on your home if you can’t make your payments.
If you’re interested in a home equity loan, the first thing you’ll have to do is figure out how much you need to borrow. Unlike a home equity line of credit — or HELOC — which allows you to draw from a line of credit as needed, home equity loans require you to have a real sense of what your project is going to cost upfront. Once you know how much you’ll need, you’ll want to calculate the value of your equity relative to the value of the home.
Your next step is to shop around for a lender. It’s recommended that you reach out to more than one, so that you can find the best available rate and terms. Our list of the top home equity loan lenders can be a great place to start.
You’ll receive the full amount at closing, and you’ll repay the home equity loan — principal and interest each month — at a fixed rate over a set number of years. Be sure that you can afford this second mortgage payment in addition to your current mortgage, as well as your other monthly expenses.
If you want to take out a home equity loan, follow these steps:
Check your Credit:
When you apply for a home equity loan, the lender will review your credit to determine if you qualify and what interest rate you’ll get—so it’s a good idea to check your credit beforehand to see where you stand. You’ll usually need a credit score of at least 620. While there are also lenders that accept lower scores than this, you will likely end up with a higher interest rate, and you might need to demonstrate a higher amount of income and greater amount of equity to get approved.
Compare Lenders and Pick an option:
Shop around and compare as many lenders as possible to find a loan that suits your needs. You might start by reaching out to your current lender, but be sure to consider other lenders, too, such as the ones we’ve listed above. Keep in mind, though, that fewer lenders offer home equity loans compared to HELOCs. Afterward, pick the option that works best for you.
Fill out the application:
Once you’ve chosen a lender, you’ll need to fill out a full application and provide any required documentation, such as tax returns or pay stubs.
Get your funds:
If you’re approved, the lender will have you sign for the loan so the funds can be released to you. You can generally expect the process from applying to closing on the loan to take anywhere from two weeks to two months.
