What is a home equity loan and how does it work?
A home equity loan allows you to borrow money against the equity of your home. This type of loan is often referred to as a “second mortgage.” The available loan amount is based on the difference between how much equity you have in your home and the current market value of your home.
The equity in your home, meaning the amount you’ve paid off through mortgage payments, acts as a sort of collateral for the money lender. Home equity loans are usually fixed-rate loans and payments will be split between the principal amount and interest.
Is it good to borrow from home equity?
Home equity loans can be a great way to invest money back into your home, but there are potential downsides. Putting your home on the line as collateral can be dangerous. If the value of your home decreases, you could end up owing more money than your home is worth.
Additionally, if you decide to move out of your home, you might not recoup enough to cover your loans during the selling process. When using the home equity loan calculator above, please understand that these loans can significantly increase your financial risk.
What credit score do I need for a home equity loan?
Your credit score is a great way for lenders to determine whether or not you’re an individual they feel comfortable lending money to. Most lenders look for a minimum score of 700, though it is possible to secure a home equity loan with a score between 660 and 700.
If your score is on the lower end of that range, you can expect higher interest rates to come with your home equity loan. You might also face additional screening during the application process than you would with a high credit score.
Where can I get a home equity loan?
Home equity loans can be secured from banks, credit unions, or special lenders. When you’re comparing lenders, be sure to look for a low fixed interest rate, no prepayment penalties, and transparent terms.
Before picking a lender, take some time to do your due diligence. Ensure the lender is legitimate by asking for their Nationwide Multistate Licensing System (NMLS) number. You can look up that number on the NMLS Consumer Access website to ensure that they are able to do business in your state. The site will also show you any complaints filed against the lender.
What is the monthly payment on a $100,000 home equity loan?
The monthly payment on your home equity loan will be determined by the total loan amount, the interest rate associated with your loan, and the loan terms. Interest rates can range from 3.25% to 8.04% and terms can range from 5 to 30 years.
If you secure a home equity loan for $100,000, with a term of 15 years and an interest rate of 4%, your monthly payment will be $739.69. In total, you’ll pay $33,143.83 in interest over that time, as well as the initial $100,000.
Our loan calculator makes it a breeze to compare a variety of lenders and loan parameters. All you have to do is plug the details in the right spots, and you can get a clear picture of the financial undertaking a home equity loan will bring.
What are the differences between a home equity loan and a home equity line of credit?
When looking for a home equity loan, you might come across the term “home equity line of credit” or HELOC. Though used for similar purposes, there are some key differences between the two.
First, home equity loans provide a single lump sum payment to the borrower, which the borrower is then expected to repay over the life of the loan. A HELOC, on the other hand, is a revolving line of credit. It gives you the option to borrow up to a certain amount, but you can borrow only what you need, and pay it back. It acts more closely to a traditional credit card than a loan.
With a HELOC, the “draw period” usually lasts 5-10 years, and it is closely followed by a repayment period. During the repayment period, you cannot borrow against the line of credit anymore. Instead, you can only pay back any remaining debt owed during that time.
What are the advantages and disadvantages of a home equity loan?
Home equity loans can be a great option for responsible borrowers to access cash, but, there are always risks associated with borrowing money. Failure to pay back the loan on the agreed-upon repayment schedule could have major consequences. Only borrow money that you are capable of paying back.