Is Now the Time to Get a Home Equity Loan?
What Exactly is a Home Equity Loan?
Every single home is worth some amount of money. We might call that its market value. That market value is reflective of a number of different factors, but the single biggest is generally the comparable sales in the area. An appraiser, when assessing the value of a home, relies heavily on the recent sales of similar homes in the area. Of course, the condition of the home, renovations, age, etc., all play a role as well.
If a person has a loan that is secured by the home – meaning they have a mortgage on the property – that loan represents a claim on that value. For example, if a person owns a home worth $250,000, and has a $100,000 mortgage on the property, if they were to sell the property for $250,000, the first $100,000 would go to the lender to repay that loan. The remaining $150,000 from the sale would belong to the seller. That $150,000 is the equity the seller owns. That amount is above and beyond any existing claims on the value of the home.
Calculating a Home Equity Loan Total
So can you borrow up to your total equity? Probably not! Lenders will typically have a loan-to-value ratio (LTV) that sets a limit on how much they will lend. Here’s an example of how you might calculate your potential home equity loan maximum:
Let’s say you have a home worth $120,000 and a mortgage of $50,000. Using an 80% LTV puts us at $96,000 (your home’s value of $120,000 x 80), and we subtract that outstanding mortgage amount for a total of $46,000 in equity available for a loan ($96,000 – your $50,000 mortgage).
Why Would I Want a Home Equity Loan?
Borrowers use home equity loans for all sorts of reasons. Generally speaking, the interest rates are lower than on other types of loan products like credit cards or personal loans. Additionally, the loans can be stretched out over longer periods of time, resulting in more manageable monthly payments, than on most other loan products.
Typically, the loan proceeds are deposited into your savings or checking account after you close on the loan, allowing you to use the funds for whatever purpose you desire. Borrowers use home equity loans to do home renovations, take vacations, pay off debt, finance educational pursuits, and more. Occasionally, in order to get a home equity loan, the lender might make paying some other debts a requirement of approval. This isn’t always the case but can happen for various reasons. This would reduce the amount of money that is ultimately deposited into your account for you to spend at your discretion.
Why Might Now Be the Time for to Get a Home Equity Loan?
Home values have increased significantly in recent years. These increased values have added significant equity that is available for homeowners to tap into. Using the same example as above, if a homeowner bought a home for $250,000 twenty years ago, and that home still has a $100,000 mortgage on it, but that home is now worth $350,000, that’s $250,000 worth of potential equity that can be borrowed against (before factoring in an LTV). Equity can be built both by paying your mortgage balance down, as well as the value of the home appreciating. And with the recent rise in home values, now can be a great time to get a home equity loan.
What About Interest Rates? Aren’t They High?
Interest rates have increased in the last couple of years, as the Federal Reserve has tried to tame inflation. So, it’s true that rates are higher than a few years ago. However, there is no guarantee of when rates will come down, or by how much. And there’s a common saying in the mortgage world – you marry the home and date the rate! In other words, when rates do finally drop, whenever that may be, you can look to refinance a home equity loan at that time. At those more favorable rates.
How Do I Get a Home Equity Loan?
You can contact a lender and submit an application. They will likely ask for standard information, including but not limited to your personal identifying information, employment information, the address of the property, any other loans against the property, how much your homeowner’s insurance is, how much your property taxes are, etc. Depending on the lender and how much money you’re looking to borrow, an appraiser may need to come and evaluate the home in order to determine the value. Once your application is approved, you’ll need to come into an office and sign some paperwork, including your loan note and mortgage document. Shortly thereafter, the loan proceeds will likely be deposited into your account.
What Are the Risks Involved?
Borrowing and using your home as collateral does mean you’re guaranteeing the loan with your home. In the event that you are unable to make your payments as agreed, the lender does have the legal right to foreclose on the home, in an effort to recoup the principle. So, it’s important that you consider your finances and are confident the payment is one that you can afford. Your lender will do their best to not overextend you, but you know your finances better than anyone. So, be sure to think through your budget, and once you’ve determined how much of a monthly payment you can afford, stick to that figure as you discuss your options with your lender.
Let’s Get Started!
If you think a home equity loan might be right for you and your circumstances, get more information or apply now, or explore our rates. You can also stop by any of our branches to discuss your interest with a teammate or call/text 216.621.4644.
