A home equity loan is one of several types of mortgages that allows you to borrow against the value of your home. If you are interested in understanding whether this kind of mortgage is right for you — and what the alternatives are — this guide will help.
What is a home equity loan?
A home equity loan is a secured loan (a loan you get by putting up collateral). In this case, your home serves as collateral to guarantee the debt. Home equity loans are also called second mortgages. You must have equity in your home to apply for one.
Home equity loans are paid back on a fixed schedule. You receive a lump sum of money when you borrow, and you repay it on a timeline predetermined with your lender. The repayment period is usually between five and 30 years.
How does a home equity loan work?
You are eligible for a home equity loan only if you have equity in your home. That means your home is worth more than you owe on your current mortgage. If you have sufficient equity, you can apply for a mortgage of this type with a lender offering home equity loans.
Your lender will evaluate your financial credentials. The amount you can borrow and your interest rate is determined based on:
- How much your home is currently worth
- Your income and credit score
- The balance on your home loan
You will find out your interest rate and payoff time up front. Loans with higher rates are more expensive. A longer repayment time also makes your loan more expensive over time since you pay more interest, although each monthly payment is cheaper.
You can use the proceeds from a home equity loan for anything you’d like. The home guarantees the loan, and if you do not make payments, your home equity loan lender can foreclose on your home.
How much can you borrow with a home equity loan?
How much you can borrow with a home equity loan depends on how much you already owe and how much your home is worth.
Most mortgage lenders limit you to borrowing no more than 80% to 85% of what your home is worth. This includes your first mortgage and your home equity loan. Some lenders let you go up to 90%.
To understand this, take a …….