Surprising Facts About Tapping Your Home Equity
Using the equity in your home could be a fiscally responsible way to enjoy your future and take care of your family's needs. But without understanding how home equity lending works, getting started might feel risky. Educating yourself can give you the tools you need to have confidence in your decision. The tips and infographic presented here can help arm you with the information you need.
Reasons to choose a home equity loan
A good place to start is knowing what you can do with a home equity loan. Some of the most common uses are: paying for your child's education, home improvement projects, car purchases, weddings costs, major expenses, and as well as debt consolidation. A plus is that home equity loans have very few restrictions on the amount, terms and use of your new cash source. What you do need to be aware of, though, is that your home has to be used as the loan's collateral—you can't apply for a home equity loan using commercial property or a manufactured home as collateral—and you can't get more money than your house is worth.
Here's a list of qualifications that the success of your home equity loan will depend on: credit score, a history of responsible credit use, verifiable income, and sufficient equity in your home.
Your borrowing ability also depends on your combined loan-to-value ratio (CLTV). CLTV is your loan amount plus your mortgage balance, divided by your home value. Discover Home Loans® accepts less than 90% CLTV for loan amounts between $35,000 and $150,000 and less than 80% CLTV for amounts between $150,001 and $300.000.
there are multiple ways to tap equity, two being a home equity loan and a home equity line of credit
Home equity loan vs. home equity line of credit (HELOC)
There may be other paths to consider. After doing some research on how to pull equity from your home, you'll probably find out that there are multiple ways to tap equity, two being a home equity loan and a home equity line of credit. One might work better for your financial needs than the other. A home equity loan allows you to receive your money in one lump sum, while a home equity line of credit lets you take a pre-approved amount of money out of an account overtime, and you only pay interest on what you borrow. The two are similar in that they both let you borrow against the equity in your home and charge interest on those proceeds. But the way you borrow, how you repay the loans and how the interest is charged are considerably different.
Now that you have a better understanding of the basics, there's one more thing you should do: ask questions. Find out if a home equity loan is right for your long-term goals or if there might be a better course of action for you. Have a discussion with a trusted lender about your financial needs and goals.