Home Equity Loan

Owning your own home is an important investment. In light of this, it’s nice to know that you have various financial options related to that investment. You can access what you’ve paid into your home and its value to make other current expenses easier to manage.

Home equity loans can be a great way to get the money you need for home improvements, debt consolidation or other expenses. They’re typically offered at lower interest rates than other forms of consumer loans because they are secured by your home, just like your primary mortgage.

What is a Home Equity Loan?

A home equity loan is a second mortgage on your home that uses your home’s equity as collateral. Equity is the difference between how much you owe on your home and its current market value. For example, if you have a $100,000 home with a $60,000 mortgage balance, you have $40,000 in home equity.

Home equity loans provide borrowers with a single, lump-sum payment that will be paid back in fixed installments over a specific time period. Home equity loans come in two varieties: fixed-rate loans and home equity lines of credit (HELOCs). In a fixed-rate loan, the interest rate remains the same throughout the term of the loan.

You have several options when choosing financing, whether you’re looking to cover expenses, reduce high-interest debt, pay student loans or meet other needs.

Alternatives to a home equity loan could include getting a personal loan or credit card, but these might not provide the most affordable terms. Credit cards and most personal loans often have high interest rates because they don’t allow you to offer any collateral as security for a loan. 

A home equity loan can be a great way to access the equity you’ve built up in your home to use as cash, especially if you invest that cash in home renovations that increase the value of your home. 

Let’s Get Your Loan Started

How to Get a Home Equity Loan

To learn whether a home equity loan is the best option for reaching your financial goals, connect with us at Compass Mortgage. To get you started, we’ve outlined the steps and documentation needed to help you understand what it takes to get approved for a home equity loan.

The Financing Process

Your part is to . . .

  • Ask any questions you have about a home equity loan
  • Share basic information about your current finances

 

Our role is to . . .

  • Obtain your credit report
  • Establish how much equity you have in your current home
  • Determine your home’s present value
  • Calculate how much you can potentially borrow
  • Discuss loan options, possible term lengths and interest rates for which you qualify
  • Request needed documents for underwriting (to establish a solid foundation for your loan application)

 

We’re with you through each step leading to closing, where you can begin to make the most of your home’s equity with the cash you receive.

Home Equity Loan Requirements

These are the common requirements typically needed to qualify for a home equity loan. If you have questions about these guidelines, we’re here to help.

  • Equity: 15-20% as a rule. (Equity is the difference between how much you’ve paid on your mortgage loan and your home’s current market value.)
  • Loan-to-Value Ratio (LTV): We’ll calculate this based on how much you owe on your current mortgage compared with your home’s value. (Substantial equity can offer greater borrowing potential.)
  • Credit Score: 620 or higher qualifies, though requirements vary.
  • Debt-to-Income Ratio (DTI): (You’ll need to provide documentation which reveals how much of your current income goes toward paying your current debts.)
  • Employment History: (You will need to furnish documents which verify past employment as well as consistent, ongoing income.)
  • Reliable Payment History: (Proof of on-time payments on current or past mortgages is helpful to qualify for a new loan.)
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Home Equity Loan FAQs

Making the most of your home and your financial goals makes a big impact on your life. It’s ok to have questions. We’ve compiled answers to the frequently asked ones, but don’t hesitate to ask more.

A home equity loan is similar to a traditional mortgage. It’s a loan rather than a line of credit. You borrow one specific amount, receive a lump sum and make regular payments during a fixed repayment period.

A HELOC differs in that it acts like a credit card. With revolving financing you can borrow, pay back and borrow again during the draw period.

For a home equity loan, you apply for the total amount of financing you need. This amount will depend on how much equity you’ve paid into your home, as that is what you’re borrowing against. You receive it as one lump sum. During the agreed-upon repayment period, you pay a fixed monthly amount that goes both toward interest and the loan principal, much like a mortgage.

Both HELOC and home equity loans offer lower interest rates than many personal loans because your home is used as collateral with the lender.

In most cases, a home equity loan is flexible and can be used for any expenses you choose.

It’s common to get a home equity loan to cover expenses such as student loans, home renovations, start-up business expenses, emergency expenses like medical bills or other purchases for which you might obtain a personal loan, such as buying a car.

Because its interest rates are lower, a home equity loan is also great for consolidating and paying down high-interest debt like what is owed on credit cards.

Once funded, you’ll quickly have access to your home equity loan funds. You can typically receive them by check or by transferring the money to your checking account.

You’ll need to start making payments on your home equity loan immediately, and you’ll usually have a fixed repayment schedule. The length of time you have to repay your loan will depend on the terms of your loan agreement.

Home equity loan interest rates are lower than other personal loans or credit cards. This is possible because you’re borrowing against an asset (your home) that helps to secure the loan. 

Your home is valuable collateral that the lender can rely on if you can’t repay your home equity loan. This makes lending the money less of a risk for the lender so that financing is more readily available.

However, you should think carefully about any concerns you have regarding repayment of a home equity loan because if you can’t make payments, your home is on the line for the balance you owe.

You’ll most likely need proof of reliable ongoing income to be approved for a home equity loan, because consistent income shows that you can make monthly payments to pay back your loan. This probably will include providing W-2s and pay stubs.

If your income is too low to get approved, a co-signer may help to meet DTI requirements.

Your DTI ratio should be 43% or less in order to qualify for a home equity loan. To calculate your DTI, add up the monthly payments on the loans you have, then divide them into your gross monthly pay. For example, if you have a student loan payment of $500, a car payment of $300 and a mortgage of $1,900 (totaling $2,500 per month) and you have a salary of $75,000 per year (or $6,250 per month), your debt-to-income ratio is 40%.

If you don’t have consistent income from a traditional job, it may be more challenging to get approved for a home equity loan; but there are other sources of income that can be considered. These might include income from investments like real estate or retirement accounts, self-employment, a pension, a trust fund, social security, child support, long-term disability or VA benefits.

We’ll help you determine if you have the necessary factors and documentation in place to get approved for a home equity loan, so contact us at Compass Mortgage! We’re ready to help.

HOME EQUITY LOAN BENEFITS
  • Easier to qualify for than many other types of loans
  • Lower borrowing costs
  • Longer terms
  • Fixed interest rates
  • No restrictions on how you can use the funds
  • Immediate access to the funds in a lump sum
  • Fixed monthly payments

Let’s Get Your Loan Started

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