How & When to Get a Home Equity Loan
Large expenses can be difficult to cover. Whether it is your child’s wedding, college costs or a kitchen remodel, coming up with funds for a big project can be the one thing that stands in the way of accomplishing your goal. Potential financing options can be expensive with high interest rates and short loan terms, pushing monthly payments beyond your budget.
If you are a homeowner who has built up equity in your property, you may have access to a low-cost home equity loan, which can bridge the gap between what you have saved and how much you need to complete your project.
What is a Home Equity Loan?
A home equity loan uses the existing equity in your home to finance large projects. Discover® home loans offers home equity loans at competitive interest rates without application, origination, or appraisal fees, and no cash is required at closing.
What can home equity loans be used for?
Home equity loans provide very few restrictions on how you use the funds, opening up the ability to afford home improvements, educational expenses, medical bills, or vacations.
When you put home equity loan fund towards home improvements, the interest you pay each year against the loan may be tax deductible. Contact your tax professional about the specific details of your situation to determine exactly what qualifies.
How is equity calculated?
The equity in your home is calculated by finding the difference between what your home is currently worth and how much you owe on your original mortgage. For example, if you own a home that is valued at $300,000 and have a mortgage that is $200,000, then you have $100,000 worth of equity.
Current values are determined by recent home sales in your area and the condition of your home. Real estate valuation sites can help you get an estimate of what your home is currently worth, and even allow you to look at home values of those around you.
How much can you borrow with a home equity loan?
Discover® home loans offers home equity loans for less than 90% CLTV, depending on the borrower’s qualifications. Use our Loan Amount Calculator to see how much you may be able to borrow.
Setting the terms of your loan will affect how much you pay each month.
When a home equity loan makes sense
The fixed interest rates from home equity loans are generally lower than unsecured options like credit cards, and the interest you pay may be tax deductible if the funds go towards substantial home renovations, reducing the total costs of borrowing. When you need money and have equity in your home, you should consider the advantages of a home equity loan.
When considering whether to take out a home equity loan, consider these questions:
- Do you have a large purchase to make or a set cost for a particular financial need? For example, college tuition is often due in a single lump sum at the beginning of the semester. A kitchen renovation involves a large cash outlay for the project.
- Do you have credit card debt at high interest rates? One common use for a home equity loan is to pay off credit card debt. Using a home equity loan to pay off your high-interest debt can lower your monthly payments.
- Have you explored other loan options? For example, federal student loan rates are often very low with excellent terms, with deferment until the student completes schooling or is no longer attending full time. A cash-out refinance or HELOC are other ways to tap into your home’s equity for financing as well.
- Do you want to pay off the loan soon to regain your equity or spread the loan out to keep monthly payments down? Setting the terms of your loan will affect how much you pay each month. If you select a 10-year home equity loan, you will have higher monthly payments but will earn back your equity sooner than with a 30-year term.
How to Apply For a Home Equity Loan
Once you have decided that a home equity loan is the best option for your financial needs, there are a few steps that can provide a smooth loan process.
- Determine how much you need to borrow. Get estimates for the services you will need if the project involves something like a wedding or a home improvement. If you are paying off debt, gather statements and determine which credit cards would benefit from a payoff. Once you know how much you want to borrow, use our monthly payment calculator to get an idea of your estimated monthly payments.
- Ask about any fees, penalties, and additional costs for the loan. With some lenders, a second mortgage can come with fees such as an origination, appraisal, filing and recording fees. However, Discover® home loans does not require these fees to be paid at closing.
- Review your credit. Each year you can obtain a free copy of your credit report. Getting a copy from each of the three credit bureaus will allow you to correct any errors before applying. Any steps you can take to improve your credit score before you apply for a home equity loan can earn lower interest rates and increase the likelihood of approval.
- Calculate how much you can potentially borrow from your home equity to meet your needs, using our loan amount calculator.
- Take care to apply online to home equity loan lenders that offer competitive interest rates, low fees and costs, and terms that match your budget’s needs for the amount you need to borrow.