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What is a Home Equity Loan?

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Len Penzo
What is a Home Equity Loan?

Home equity loans are personal loans which allow you to access and take advantage of the value that has built up in your property through the years.

By using your home as collateral, you can access that little bit of extra cash you need for everything from major renovations to other vital projects.

How Does a Home Equity Loan Work?

Many people who have bought homes are fortunate enough to see the value of them rise as the years pass by. This means they have ‘equity’ – which is the value of their interest in the property.

For example, if your home was worth $250,000 on the current market but you only have a remaining mortgage balance of $175,000, you could potentially borrow a percentage of the $75,000 of equity which exists in the property.

How Do I Get a Home Equity Loan?

Of course, your starting point for accessing such a product would be to apply to lenders to get a clear idea of what you may be able to borrow. They may take steps like carrying out a property appraisal or valuation to confirm the figures involved and then the loan would be made available.

As with any loan, you would, of course, need to repay it over time with a fixed rate, although one benefit of a home equity loan is that you may access lower APR than on other types of loans.

One key issue to bear in mind is that you would be using your home as collateral, so failing to keep up with repayments may have significant consequences.

How Much Can You Borrow in a Home Equity Loan?

The big question after ‘what’s a home equity loan?’ is usually ‘how much can I get from a home equity loan?’. Essentially this depends on the value that of your property, meaning it changes from person to person and from property to property. You can use the formula above to give some indication of what could be possible for you.

In theory, having plenty of equity in a property means being able to access a large amount. It is very common for lenders to require you to have between 15 and 20 percent in order to proceed with the loan.

As ever though, it is important to bear in mind that you would not want to overstretch yourself when your home is collateral. You might want to calculate your debt to income ratio to assess your current situation with income and expenses before choosing the take the step.

Are There Other Approaches I Could Take?

It is worth remembering that a home equity loan may not be the only course of action suitable in your situation. There are other approaches available to those looking to access some of the equity in their property. The most obvious might be to get a Home Equity Line of Credit – which is also widely referred to as a HELOC.

How does a HELOC work?

While a home equity loan would give you a lump sum which you would then repay over time, a successful application for a HELOC would mean you are given a maximum figure of what you can borrow across a period of time. So, rather than get a big loan in one go, you have a flexible pot that you can dip in and out of as you choose.

Furthermore, you would only pay interest on what you actually go on to borrow.

What are HELOC rates like?

It is not uncommon for HELOC borrowers to only have to make small payments in the initial years of the deal, often as a result of an introductory period or similar offer. However, as time goes by the cost of repayments and interest may increase, so bear that in mind when considering this as an option.

If you are not sure about a HELOC, another approach could be to consider a cash refinance. This would essentially replace your existing mortgage as it would see you take out a loan that more than covers the cost of your property. You could then use the excess to fund your future plans.

Consider Your Loan Options Today

Personal loan deals come in all different shapes and sizes these days, but if you are a homeowner who has built up a significant amount of equity through the years then a home equity loan could well be an option to consider.

Take a look at the rest of our website to see how the option compares to other products and whether it could ultimately be the one for you.