What is Home Equity Loan?
Your home is more than just a place to live—it’s a powerful financial asset that can help you achieve your goals. Whether you’re looking to renovate your kitchen, consolidate debt, fund a major life event, or invest in your future, a home equity loan could be the key to making it happen.
But how does it work, and is it the right choice for you?
Let’s break down everything you need to know about home equity loans, from how they function to the benefits and considerations you should keep in mind. By the end, you’ll have a clearer understanding of how to leverage your home’s value to meet your financial needs.
Ready to take the next step? At Sprint Funding, we’re here to guide you through the process and help you unlock the potential of your home. Contact us today to explore your options and get started on your journey toward financial flexibility!
Home equity is the portion of your home’s value that you truly “own.” It’s calculated by subtracting the amount you still owe on your mortgage (and any other loans secured by your home) from the current market value of your property.
For example, if your home is worth 400,000 and you owe 250,000 on your mortgage, your home equity would be $150,000.
This equity grows as you pay down your mortgage and as your home’s value increases over time. Home equity represents a valuable financial resource that homeowners can tap into through options like home equity loans or lines of credit.
The availability of a home equity loan helps you borrow up to the current value of the home. Here, you gain a single cash sum, usually used to repay you over a five to 15-year fixed term through a fixed interest rate.
Let’s assume a $50,000 loan obtained at 6 percent. During the payoff, you have a known sum that you owe the bank.
A common use of such large expenses includes payment for home renovation, college funds, or perhaps paying off more expensive interest in other loans and credit cards.
However, you must think in terms of the total cost to repay because longer terms end up more expensive.
Nowadays, lenders approve only those applicants whose credit scores are above 660 or 700, but those with any lesser credit score might be charged an interest rate comparatively higher.
Home equity loans help homeowners in getting funds using the equities in property. Homeowners can get the fixed repayment option, which makes the loan a preferable one for more significant expenses and debt consolidation at much lower interest rates.
The interest rate on a home equity loan is substantially lower than a credit card or even a personal loan.
A home equity loan is approximated at an average rate of about 8.60%, as compared to an average of approximately 12.35% on a personal loan. You will, therefore, save thousands with the loan if taken for most of your lifetime.
Home equity loans mainly carry fixed interest rates so the dollar amount of your monthly payments doesn’t change from month to month. This stability allows you to budget for such unforeseen costs. Having longer pay-back periods results in smaller monthly repayments, so your cash flows will be less affected.
A home equity loan can finance many expenses – from a renovation of a home to the funding of significant bills, like surgeries or college.
It is also a very powerful way to combine the high-interest balances of numerous credit cards, as well as other high-interest loans. That often cuts down thousands in paid interest and can unify the payment for those debts.
Home equity loans also offer some tax benefits. In the case of qualified residential loans, it’s possible to deduct the interest paid on home equity loans up to $750,000, or up to $375,000 for married couples filing separately.
Always check the qualifications with a qualified tax professional.
While home equity loans can open up funds, they carry a major risk. Impulsive borrowing on the equity of one’s home is likely to throw one into stress at best, and in worse-case scenarios, it will result in the loss of one’s property if he/she cannot repay the loan.
A home equity loan is essentially secured by the property, therefore the lender would be able to place a lien on it.
If unable to pay this loan, you have the risk of foreclosure. With a $50,000 loan at 7% interest, for example, you could spend nearly $20,000 extra in interest along with extra charges over 15 years.
Financial shocks in the form of loss of a job or unexpected medical conditions make repayment difficult. Because the loan is specifically tied to the homeowner, borrowing requires much greater caution.
Using home equity to take out a loan will put you in a risky cycle of debt if you are not careful. Using this equity for non-essential items like vacations shows lifestyle inflation. Plus, using such loans to finance daily expenses will only exacerbate financial instability.
The moment a borrower faces difficulties in repaying, the result is more debt, thus further financial stress is incurred. Although some borrowers maintain a balance of 0% in HELOCs, it can be problematic when faced with fees or repayments.
Home values can appreciate or depreciate, which affects equity. If property values decrease, your remaining loan balance could be higher than your home’s value. This reduces the ability to refinance or sell.
In volatile markets, borrowers should be very cautious and analyze trends before securing a loan.
Applying for a home equity loan requires some steps to be taken to qualify and get the best terms. From calculating the value of your home to gathering the right documents, the process can make you better informed and make applying easier.
First, compile all your relevant documents. Your lender will demand proof of income, so load up the pay stubs, W-2s, or tax returns, if you’re self-employed. You will need information regarding the current mortgage and property tax to confirm your earnings and assets used in evaluating your home equity.
Lenders require at least 20% equity, meaning, for a $400,000 home, you will need to have $80,000 of equity before applying. Having all these documents available can accelerate the process, which could take four weeks or more.
Terms among lenders on the loan will be different. A lender allows 85 percent and another is on an 80 percent level, interest and fee charges also have differences while different repayment conditions might apply.
But with the mid 600 credits one can get in, credit over 700 has the best terms in them saving the amount of possibly thousands in one loan life. Read online reviews, request a personalized quote, and use comparison tools to find the best deal. Shopping around ensures you will not overpay.
You apply with the appropriate documents to the chosen lender after deciding on who to use. They tend to scrutinize your credit history, your debt-to-income ratio, and your plan of attack to repay. It is then that the process is complete, but may vary regarding approval time.
Home equity loans represent an intelligent use of cash acquired from the value built in a home. With fixed terms, the payments on such loans can be predictable for larger bills, such as remodeling or consolidating debts.
At the same time, the risks included with home equity loans are critical considerations since missed payments directly impact the property.
Take time to evaluate your finances, compare rates, and understand the terms before making a decision. With careful planning, a home equity loan can help you achieve your goals.
If you want to learn more, contact Sprint Funding. With the right support, you can achieve anything.
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