If you’re curious about how to get the best deal when buying a new house, you’ve surely learned that the possible solutions are diverse and complex. You may have heard of home equity loans by the name of a “second mortgage”—but don’t give up on the concept just yet!
In this article, we break down some of the pros and cons of home equity loans as well as basic questions answered. Let’s start at the beginning!
A home equity loan is known by several other names: some call it a second mortgage, a home equity installment loan, or an equity loan. All these names refer to the nature of the loan, which is consumer debt. That is, home equity loans look at the amount of difference between the homeowner’s due mortgage and the current market value of the house.
While there are variable rate home equity loans, most commonly this type of loan is fixed-rate. Home equity loans that are not fixed-rate are known as Home Equity Lines of Credit (HELOCs). The difference between these two types of loans is the fixed-rate home equity loan offers one lump sum to the borrower, while the HELOCs offer a revolving line of credit.
The short answer to this question is yes! The minimum recommended credit score to apply for a home equity loan is 620, and a reasonable payment history strengthens your case as well. These two things, coupled with the rate of the loan and the amount borrowed, affect the length and terms of the loan.
Well, it’s not for nothing that home equity loans are sometimes called a “second mortgage”! In this type of loan, collateral for the lender is obtained in the form of equity in the house. The amount of Combined Loan-to-Value (CLTV) Ratio determines the amount a borrower is allowed to accept; these are typically between 80%-90% of the home’s appraised value.
Much like standard mortgage payments, home equity loan borrowers must make fixed, scheduled payments which cover both interest and principal. If the loan is not paid in full, the house can be sold to repay the loan.
If you’re planning on putting a lot of extra money and attention into your home, home equity loans can be a great way to convert equity into cash. This can then be funneled into projects designed to increase the value of your house—so should you ever want to sell it someday, you may make a profit.
It’s important to remember that this is always a gamble. With a fluctuating housing market, you could actually lose money when it comes time to sell your house—so when it comes to home equity loans, go through the professionals who can help you crunch the numbers and make sure you stay on track.
Check out our recent article on the topic, or browse for a local consultant to get started today!