There are many types of mortgages in the housing market, all of which fall under one of two categories: fixed-rate and adjustable-rate mortgages (ARMs). Some fixed-rate mortgages include government-sponsored ones like VA loans, FHA loans, and USDA loans. Other fixed-rate mortgages include conventional loans, conforming and non-conforming loans, amortizing and non-amortizing loans. The three adjustable-rate mortgages used in the housing market are hybrid, interest-only, and payment-option loans.
The one home loan that stands out as a major outlier to these other mortgage loans is the home equity loan. Also known as a “second mortgage,” in contrast with an actual mortgage, the funds tend to be immediately available and there are no limits to how the funds can be used. Sounds like a pretty sweet deal, but before taking one out, it’s important to know all of the ins and outs of home equity loans. The good news for homeowners residing in Florida, Maryland, and Virginia is that MCS Mortgage is here to answer every crucial question regarding home equity loans!
What is a home equity loan?
In layman’s terms, a home equity loan is a lump sum loan that’s borrowed against the equity of the borrower’s home. This means that a homeowner is using their home as collateral as a condition for getting the loan. This also subjects the home to foreclosure by the lender if the borrower defaults on their payments.
There are two types of home equity loans: the lump-sum loan that allows homeowners to borrow against the value of their home, and the Home Equity Line of Credit, also known as HELOC. In contrast with a lump-sum equity loan, HELOC is a variable-rate line of credit based on the value of the borrower’s home. This means the borrower can continually borrow from their HELOC and pay back the owed amount within a fixed timeframe.
Why Take Out a Home Equity Loan?
Home equity loans are a good alternative to taking out credit cards, personal loans, and even student loans. Not only do home equity loans reduce the temptation to overspend on credit, but they also have a repayment period ranging anywhere from 5 to 30 years depending on the amount borrowed. Another perk to home equity loans is that they are repaid with a fixed interest rate.
Because funds from home equity loans have no restrictions, they can be used to fund temporary high expenses like higher education, medical expenses, and home renovation. Home equity loans can even be used to consolidate existing debts, including credit card and student loan debt. Given the flexible nature of home equity loans, most lenders and financial institutions offer them, including online lenders, banks, and credit unions.
How does a home equity loan work?
Most lenders who offer home equity loans allow homeowners to borrow as much as 80-85% of their home’s equity. The amount of equity built is determined by the value of the home minus the amount still owed on the borrower’s existing mortgage. The less money that’s owed on the existing mortgage, the more equity the home has.
Once an application for a home equity loan has been submitted and a credit check has been performed, the lender will be able to determine the amount of money that be can borrowed. The lender will also determine the loan term, the interest rate, and the monthly payment schedule. The lender will also communicate any additional fees that need to be paid. Once the home equity loan has been finalized, the funds are then disbursed as one lump sum the loan is repaid in fixed monthly payments.
What Are the Qualifications for a Home Equity Loan?
To qualify for a home equity loan, a homeowner must have a bare minimum 15-20% home equity. The homeowner must also have a minimum credit score of 620 or higher, along with a debt-to-income (DTI) ratio of 43% or lower. The homeowner must also have stable employment and consistent, on-time payment history.
MCS Mortgage is a licensed mortgage broker that services the states of Florida, Maryland, and Virginia. In Maryland, MCS services the areas of Annapolis, Baltimore, Bethesda, Columbia, Towson, and Upper Marlboro. In Virginia, MCS services the areas of Annandale, Alexandria, Arlington, Catonsville, Falls Church, Fredricksburg, Fairfax, Fairfield County, Gainesville, Loudoun County, Manassas, Prince William County.
To learn more about home equity loans, contact MCS Mortgage by phone at 833-415-LOAN or by email at Hello@MCSMLS.com for a consultation.