The purchases of homes were up last year, with over five million homes being bought by Americans. Whether they were first-time homebuyers or people looking to relocate, many individuals took advantage of record low-interest rates.
If you’re in the market for a second property or need to pay off some debts, you’re in luck. There are a variety of options available to you, including a home equity loan. Tap into the money you’ve built up in your home by accessing one large lump sum.
What's in this article?
This guide will discuss how to get a home equity loan in the Minneapolis area, including in other areas of the country. We’ll also go over the benefits of this type of loan over your other options.
What’s a Home Equity Loan?
With a home equity loan, you can access a lump-sum amount you make payments on at a fixed interest rate. However, you have to have enough equity available in your Minneapolis area home to make this type of loan work.
The difference between what you owe on your mortgage, and the value of your home, is equity. As you make consistent payments on your home, you’re building up its equity. Additionally, if the real estate value has gone up in your neighborhood, that’ll also increase your home’s equity.
Home equity loans are great options if you know how much money you need to access and when you want it. You can use a home equity loan for the following things:
- Debt consolidation
- Home renovations or improvements
- Business expenses
- Emergency costs
- Wedding funds
Ready To Take Your Next Step?
How Much Money Can I Borrow?
You can typically borrow about 80-85% of the value of your home, minus the amount you owe on your mortgage. There are two steps to determining how much home equity you can borrow.
First, multiply the value of your home by the percentage your lender is willing to let you borrow. That gives you the maximum amount of home equity that you can borrow.
Then, taking that number, subtract how much you have left on your mortgage. That gives you the total amount of money you can borrow.
For example, imagine that your house is worth $350,000, and you owe $200,000 on your mortgage. Your lender will let you borrow no more than 85% of the value of your home.
You’ll multiply $350,000 by .85 or 8%, giving you $297,000 in total value that you can borrow. Subtracting out the $200,000 you owe on your mortgage; you’ll find out you can borrow $97,500 as a home equity loan.
What Are the Requirements for a Home Equity Loan?
The requirements to qualify for a home equity loan are different depending upon what lender you go to. The approval process is similar to the one for a new home loan. Your lender will evaluate your application, including your credit score, your house’s equity, and your debt-to-income (DTI) ratio.
You’ll need to have built up at 15-20% equity in your Minneapolis home to qualify for a home equity loan. If your home is worth around $250,000 and you still owe $200,000 on it, the equity is about $50,000, or 20%.
You’ll also need a credit score of around 680. Your interest rate for your home equity loan will be better the higher your score is. You could potentially qualify with a credit score of 600, but your interest rate might be higher.
The Advantages and Disadvantages of Home Equity Loans
When applying for a home equity loan, it’s important to know both the pros and cons. Knowing both will help you make an educated decision that’s best for your situation in Minneapolis.
Home equity loan rates usually have a lower interest rate than other types of loans. This is because they’re a secured form of credit that uses your house as collateral.
Fees and Closing Costs
You can expect to encounter the same type of fees and closing costs with a home equity loan as you would a traditional mortgage. You can ask to have the fees and closing costs added to your loan. However, expect to have the overall amount of your loan increase if you do that.
Fixed Repayment Terms
A home equity loan usually has fixed monthly payments and fixed terms. The terms are typically 5 to 30 years. You’ll know ahead of time what your payment amount is every month and when you can expect it to be paid off.
When you take out a home equity loan, you can use the lump sum in any way you’d like. You can even use it to go on that dream vacation you’ve wanted to do for years.
What’s the Difference Between a HELOC and a Home Equity Loan?
A home equity line of credit (HELOC) gives you a bit more flexibility than a home equity loan. With a HELOC, you still have the total amount that you’re borrowing. However, you only borrow what money you need and then pay it off.
You can continue borrowing and paying it off as you need the money. You pay off a HELOC in increments based on how much you borrow rather than making payments on the entire amount of the loan.
One of the major differences between the two is that a HELOC has adjustable interest rates. Your interest rate could fall or rise over the duration of the loan. This results in your payments not being as predictable as with a home equity loan.
The interest rates for a HELOC are typically lower when you get the loan. After an initial phase of about six to 12 months, you can expect the interest rates to rise.
Connect With Compass Mortgage for Your Home Equity Loan Needs in the Minneapolis Area
Whether you need to access funds to pay down your debt or want to renovate your Minneapolis area house, a home equity loan is a great option. Don’t let the equity you’ve built up in your home go to waste. Tap into it and use it to your advantage.
Contact us today to schedule an appointment and learn more about qualifying for home equity loans in 2022. We help homeowners in Illinois, Iowa, Florida, Minnesota, Wisconsin, and Tennessee access the equity of their homes.