If you are needing cash and have some equity built up in your home you may be considering a home equity loan.
Using the equity in your home to get cash.
You can either get a home equity line of credit (HELOC) or a home equity loan.
What is a Home Equity Loan?
A home equity loan is a loan, or second mortgage given using the borrower’s equity stake in the home as collateral. A home equity loan is separate from the mortgage and will generally have a much shorter repayment term.
You can get a home equity loan either as a typical loan, or as a running line of credit, referred to as a HELOC loan.
Home Equity Loan
A loan will provide you with a lump sum of cash with scheduled fixed monthly payments with a fixed interest rate. The amount you can borrow will depend on the amount of equity you have. Many lenders will loan you up to 75% of the home’s value, up to $625,000.
Home Equity Line of Credit
A line of credit will work similar to how a credit card works. The bank will give you an amount of credit that you can borrower as needed. You will only be charged interest on the amount you borrow. Like an equity loan, a HELOC will allow you to borrow up to 75% LTV.
- Borrowers with large equity stakes in their home
- Good to Excellent credit is usually required (640-680 credit scores)
- Debt to income ratio under 41%
Who Should Get Home Equity Loans?
Home equity loans and HELOC loans should be taken out with caution. If a borrower is unable to repay the second mortgage, they can lose their home. Home equity loans are best for homeowners looking to make home repairs or upgrades.
Reinvesting cash from an equity loan back into the home makes the most financial sense. Investors get home equity loans to update a rental property to be able to rent it out for more money.
Debt Consolidation Loan
Using your home’s equity to get a loan to repay credit card, or other types of unsecured debt is not a good idea. Credit card debt is unsecured, meaning if you don’t repay it, you won’t lose anything. If you are struggling with credit card debt, or other types of debts a personal loan is a much better option.
Is a HELOC the right type of refinance?
There are several options to consider when refinancing a mortgage. Home equity loans, cash-out refinances, and streamline refinances. To determine which type of refinance is best for you will depend on what your goal is. If you are looking for extra cash then a cash-out refinance or HELOC loan would be a good fit. If you want to lower your monthly payments, or get a lower interest rate then you may qualify for a streamline refinance, or HARP.