What is a home equity loan?

Among the stubborn Inflationsenior interest rate and others Economic concerns, Americans are feeling the pinch. Given the current state of the economy, many are looking for options to settle or pay off debt.

Those strapped for cash can turn to credit cards or personal loans to overcome rough financial spots, or tap into their 401(k) for funds to pay off loan balances.

Another option to access cash is to take out one Home equity loan. These loans have many advantages but are not ideal in other situations. It really depends on your personal situation. Before you proceed, it is imperative to have a better understanding of home equity loans. You can now check your home equity loan options online here to see if it’s right for you.

What is a home equity loan?

A Home equity loan This is a second mortgage that allows you to borrow a lump sum against the equity in your home. Like your first mortgage, a second mortgage is secured by your property.

Home equity is the difference between the current value of your home and the amount owed on your mortgage. For example, let’s say you initially bought your home for $300,000. Over time, the value of your home increases to $400,000 while your monthly payments reduce your loan balance to $250,000. In this scenario, you would have $150,000 in home equity ($400,000 – $250,000).

Typically, lenders will let you borrow 80% of your home equity or 80% loan-to-value (LTV). So using the example above, you can borrow $120,000 (80% of $150,000).

Home equity loans typically have fixed interest rates and repayment terms ranging from five to 30 years. The interest rate you receive will depend on many factors, including your income, credit history, home value, and the existing balance on your home loan.

Advantages of using home equity loan

Home equity loans come with several benefits, such as:

• Lower interest rates: Because your home secures the loan and reduces your lender’s risk, home equity loans often come with lower interest rates than other credit options like credit cards and personal loans.
• Possible tax deductions: The The IRS You may be allowed to deduct the interest on your home equity loan if you use the funds to build or make significant improvements to a qualified residence. Consult your accountant or tax professional to determine your eligibility for this exemption.
• Budgeting is easy: With a fixed interest rate, your payments stay the same over the life of the loan. As such, you can include your expenses in your long-term budget and plan accordingly.

If you think you could benefit from using a home equity loan, get started today. Check eligibility and your local offer here.

How to Apply for a Home Equity Loan

Before applying for a home equity loan, make sure you have at least 20% equity left in your home after taking out the loan. Lenders usually look for a Credit score At least 620 and regular timely payments on your existing mortgage. It is also important to maintain a debt-to-income ratio (DTI) of 43% or less. DTI measures the amount of your monthly debt bill against your monthly gross income.

If you have enough equity and want to Take out a home equity loanFollow these steps:

• Get loan estimates from multiple lenders to compare rates and repayment terms.
• Select the loan offer that best suits your needs.
• Review the disclosure documents detailing the loan agreement terms and proceed only if you agree.
• Get a home appraisal if your lender requires it, and submit any supporting documents your lender requests.
• Close the home equity loan and get funded, usually for a lump sum.

remember Truth in Lending Act (TILA) Protects the right to change your mind and cancel your loan without losing money, as long as you do so within three days.

When a home equity loan may not be beneficial

In certain situations, a home equity loan may not be your best option.

If the interest rate on a new home equity loan is higher than your existing account or other types of credit, you may want to consider other options. For example, if you plan to use funds from a new loan to consolidate debt, it may not be advantageous if the current home equity interest rate is higher than the debt you intend to pay off. Current home equity loan rates typically range from 5% to 16%.

The most significant disadvantage of a home equity loan is that it puts your home at risk if you don’t make your payments. If your source of income is unreliable or you carry a significant amount of debt, getting a home equity loan is probably not your best financial move.

Financial experts generally recommend against getting a home equity loan or Home Equity Line of Credit (HELOC) For short-term expenses like an expensive vacation or wedding. Depending on the tenure of your loan, you may be paying interest on the loan amount for years or even decades, long after you enjoy the benefits.

Bottom line

A home equity loan is a valuable tool to help you tap into your home equity for cash that you can use to pay for home repairs, renovations, and other purposes. If you’re considering a home equity loan, run the numbers to make sure it makes financial sense. Remember to account for Closing costs On a new home equity loan, typically 2% to 5% of the loan amount.

Also, consider alternatives, such as a HELOC. A HELOC is a line of credit that works like a credit card. This allows you to borrow what you need in small increments as needed up to your approved limit. As with a home equity loan, your home secures your HELOC, which puts your home at risk.

If you plan to take out a home equity loan, get multiple loan estimates and select the loan offer with the most favorable interest rate and terms for you. You can easily explore your home equity loan options now here or by using the table below.