Review Your Current Personal Finances
Before thinking about getting a loan to take advantage of your home’s equity, you’ll need to have a good idea of where you stand. Having a good credit score and payment history can make a big difference in the interest rate you’re able to get with an equity loan.
- Have you been paying off your credit accounts on time?
- What is your current ratio of balances owed to credit/loan limits (Revolving Utilization Percentage)?
Payoff credit lines on time
Making payments on time and for the minimum amount (or more) is essential to keeping a good payment history, which counts for 35% of your credit score calculation.
Revolving Utilization Percentage
This is important to look at. If your balances are close to the extended credit limit, your ratios will be quite high. For example, a credit card with a $2000 balance with a $5000 credit limit would be 40%. If you consistently keep those balances high, you are at a higher risk.
What’s Your Current Equity?
Take a look at your outstanding balance on your mortgage statement and subtract it from your original loan amount. This will give you a rough idea of how much equity you have.
Can I Borrow the Whole Equity Amount?
Lenders impose borrowing limits (often 80% to 85% of your available equity), so a loan or a refi makes the most sense if you’ve paid down a sizable portion of your mortgage.
How Much Is Your Home Worth?
There are many websites that offer ways to estimate your home’s value without getting an appraisal. Some popular choices might be Zillow.com and Realtor.com.
What Types of Equity Loans Are Available
There are three different types of equity loans available.
- Cash out refinance
- These are especially beneficial if you are paying off a loan with a higher interest rate. You are simply replacing your old loan with a new one with a higher loan amount.
- You can use a cash out refi for many different things like paying off car loans and credit cards.
- Home Equity Loan
- This is an additional loan based on your equity. Great if you already have a good interest rate on your first and you don’t want to give that up. They have a fixed interest rate too!
- Good for paying for education, medical fees, and debt consolidation.
- Home Equity Line of Credit (HELOC)
- This is a revolving line of credit, similar to a credit card. Take money out, pay it back, borrow some more, pay it back. It’s the most flexible and very convenient.
- Your payment is based on the amount of credit that you withdraw rather than the available loan amount.
- HELOCs usually come with no closing costs and are often discounted at the beginning of the loan term and then increase after 6-12 months.
- A downside to these loans is the interest rates are usually variable. They change with the market.
Find A Lender
When you’ve decided which home equity loan you’ll need, you’ll want to contact a lender or mortgage broker to price out loans. You’ll want to get quotes from a few different lenders or a mortgage broker who can search through several lenders to find the best loan and rate for you.
Be Cautious
Remember when you get a Home Equity Loan or a HELOC, you are using your home as collateral for the loan. If you default on the loan, you could go into foreclosure and possibly lose your home.
Another thing to keep in mind is if the market goes down and real estate values fall, you could end up owing more than your home’s worth. Be careful not to drain all of your home’s equity.
Finding the right loan for you can help tap into your home’s equity and put that money to good use. From home repairs/upgrades, paying off loans like medical bills, education loans, or credit cards to starting a new business. By remembering not to borrow too much of your equity, it can help alleviate stress by taking care of other financial burdens.
