Home Equity Loan

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 $2,700 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.