Everything You Need to Know Before Taking Out a Home Equity Loan

You might have heard of HELOC loans or home equity loans.  It is just a loan secured by your home. Although there’s a lot to know about home equity loan and we have taken it upon ourselves to discuss that in this guide.

Everything You Need to Know Before Taking Out a Home Equity Loan

What is home equity?

Home equity is the current value of your home minus any outstanding loans,, also known as your mortgage. In other words, it’s how much you genuinely own of your home. The rest of these is how much the bank owns, and how much you took out for a mortgage.

One thing you need to know is that your home equity increases as you pay off your mortgage.

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Home Equity Loan VS Home Equity Line of Credit

Two different loan options for homeowners are home equity loans and home equity lines of credit in case you don’t know.

A home equity loan,, also called a term loan, is a one-time lump sum paid off over a set amount of time and with a fixed interest rate on the same payments each month.

The loan can be thought of as a second mortgage unless the borrower spaces out payments over an extended time. It depends on how much home equity you have to qualify for a large loan with a low-interest rate whilst using your house as collateral.

You should note that a home equity line of credit (HELOC) works exactly like a credit card allowing you to borrow up to a certain amount for a time limit set by the lender. Throughout that time, you may withdraw money as you may need it and as you like.

It is possible that you can get a much larger line of credit with your home equity. Credit cards can offer lines of credit up to $15,000, whereas HELOCs can offer up to $50,000. Indeed, your credit history, equity, income, among other factors, can decide how much you’ll receive.

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HELOCs have variable interest rates, meaning that they could quickly fluctuate one way or another due to macroeconomic factors outside your control, unlike home equity loans.

Everything You Need to Know Before Taking Out a Home Equity Loan

Which should you get?

If you’re aiming to finance a large project, have a set amount at the back of your mind, and don’t plan on taking another loan sooner, a home equity loan could be right for you. For instance, if you’re borrowing money to do some work on your home, you would be safe to get a home equity loan.

Home equity loans also have more extended borrowing periods, with fixed interest rates giving you the chance to have a more structured payment plan.

Also, a home equity line of credit is best for those who need a revolving line of credit over years. There are a variety of reasons you could get a HELOC over a regular line of credit.

A few of the reasons include:

Making improvements to your home

Like a home equity loan, borrowing money against your home and investing it back into fixing it up sounds better. HELOC could make a lot of sense for fixer-uppers that need a bunch of minor improvements, enabling you to continue borrowing money when the need arises.

Everything You Need to Know Before Taking Out a Home Equity Loan

Consolidating high-interest credit cards

HELOCs have low-interest rates for the creditworthy. This means, using a HELOC to pay off credit cards with interest rates like 15 or 20 per cent can help you pay off debt more quickly than a balance transfer.

A backup emergency fund

One of the greatness of HELOCs is that they’re like credit cards. Your money is there when you need it. Having it as an emergency fund just in case of unexpected expenses could save you.

What kind of credit do you need to get a home equity loan?

Those with poor credit can get home equity loans and try to avoid HELOCs. However, it’s essential to know that your home will serve as the collateral if you can’t pay back the lender. Also, let’s say you are the type with poor credit. You may not get the most significant interest rate on your loan.

Suppose you own more of your home than you owe on it. In that case, you’ll be seen as a lower-risk candidate meaning that the loan amount or line of credit you’ll receive will be higher, which gives another important reason to consider putting at least 20 per cent down payment on your home when you buy.

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When should you NOT

When should you NOT use your home equity to take out a loan?

While HELOCs and home equity loans are an excellent opportunity for homeowners, there are a few times when you should avoid them. Some of these are:

If you’re planning on selling your house soon

If you’re planning to move and you might not be able to quickly pay off your loan or line of credit, you shouldn’t take out a home equity loan. This is because, before you move, all your debts on the house will need to be paid off.

If you need a last-resort loan

It’s essential to re-think that you’re putting your home at risk by taking either of these two loans. If you can’t pay back the lender, they could take your house from you, and of course, you may not want that!

If you have poor spending habits

Using a HELOC to pay off credit card debt can be a good idea if you don’t address the reasons you got into debt in the first place. Before you can get out of debt, you need to deal with all your negative spending habits and come up with a way to avoid going into debt in the nearest future.

If you have poor spending habits

Where to get home equity loans or lines of credit

The best place to start looking for home equity loans or lines of credit is LendingTree. You can easily compare a handful of rates all in one place and see which one is best for you. At writing, LendingTree has an APR as low as 3.24 per cent for home equity loans. Hesitate