Home Equity Loans: 6 Tips When Shopping for Home Loans
Did you know that home equity loans can be used for virtually anything?
32% of homeowners took out a home equity loan in the past year to pay for an unrelated expense.
So naturally, you’ve been wondering how you can take out a home equity loan. Luckily, we’re here to guide you to the best homes loans! So get ready for the best read of your life.
What Is a Home Equity Loan?
A home equity loan refers to a lump sum of money that comes from the equity in your home. Home equity loans have a fixed interest rate.
If you’re not familiar, a fixed interest rate does not change. In other words, the interest rate will remain the same throughout the term.
Typically, most home equity loans have a 5% interest rate with restitution terms of up to 30 years. However, you’ll need to have 15% to 20% equity in your home before you can qualify for home improvement loans.
1. Only Get a Loan if You Absolutely Need One
There are many reasons why people take out home equity loans. One of the most common reasons is to renovate their homes which is why they’re called home improvement loans sometimes. However, some people take out home equity loans for emergencies, hospital bills, weddings, and purchase a second home.
Some homeowners take out home equity loans instead of refinancing their homes. This is because home equity loans have a lower interest rate. Therefore, they’re also used to consolidate other credit card or school loan debts. Overall, home equity loans can be used for just about anything.
2. Manage Your Finances Beforehand
The answer to this question depends on your yearly and current finances. It’s recommended that you have a steady flow of income and budget accordingly when taking out any type of loan.
But before you take out a home equity loan, you should figure out how long you plan on staying in your current home. If you’re planning on selling your home soon, you’ll still need to make payments on your home equity loan and any other new loans. So always budget accordingly.
Overall, the best time to take out a home equity loan is when you feel financially responsible.
3. Know the Pros and Cons of Home Equity Loans
Just like most loans, home equity loans have their pros and cons. For starters, home equity loans have a lower interest rate than credits cards and personal loans.
You can also claim your interest charges on your taxes in some states. Lastly, you’ll have a fixed monthly rate and a high payout amount. So if you have a big expense, like a wedding, a home equity loan could potentially pay for all the expenses.
Now let’s talk about some of the cons of getting a home equity loan. For starters, if your home value drops or you miss payments, you could lose your home.
The closing costs are also very expensive, and you’ll have a longer payment period. Overall, the goods seem to outweigh the bad. However, you should still speak to a professional loan officer before taking out a loan.
For more information, you can visit https://www.farmersbankidaho.com/personal/home/mortgage-loans for the best home equity loan counseling.
4. Have All The Necessary Paperwork Ready
To start, you can use a home equity loan calculator to determine how much you can receive, based on your home. You’ll also need to check your credit, evaluate your home’s equity, and calculate how much debt you’re currently in.
When officially applying for a home equity loan, you’ll need these documents:
- Appraisal of your home
- Last two W-2’s
- Pay stubs
- Home insurance declarations page
- Current mortgage statement
- Employment information
- Social Security number
- Any information regarding alimony or child support
- Record of homeownership
- Existing charges on your home
Some banks may also charge you to apply. They may also ask for additional information. Therefore, be prepared with any personal paperwork.
5. Learn if You Qualify for Bad Credit Home Loans
Having bad credit doesn’t exempt you from applying for a loan. But it might be harder to get approved for a loan.
Nevertheless, not every lender is the same. Therefore, you should shop around and see which lender is more accepting of poor credit. But here are some of the basic rules many lenders require:
- Stable income and employment
- 15 to 20 percent equity in the home
- No more than a 43 % debt to income ratio
- All bills paid on time
- Maximum credit of 620
You don’t have to meet all of these requirements. However, it’s recommended that you have at least 3 of these. You could also consider getting a co-signer for a home equity loan.
6. Use a Home Equity Loan Calculator
A home loan calculator will tell you how much you can receive based on your home value and the amount you owe on your home. This tends to confuse some homeowners because they don’t know about their home equity.
But you can easily calculate your home equity by dividing the amount you owe by the value of your home. Remember that the value of your home is the amount you paid when you first bought your home.
For example, let’s say you owe $150,000 on a home that’s worth 350,000. Therefore, the calculation would be $150,000 / $350,000 = 0.43 or 43. What this means is that you’ll have a 42% equity in your home.
You can then compare this number to the lender’s maximum LTV ratio. This will ultimately tell you much money you can receive from the lender.
Getting a Home Equity Loan Has Never Been Easier
Home equity loans are a great idea if you’re in good financial standing. But always remember to ask your loan officer questions about the terms and conditions. This way, you’re not left with any surprises!
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