Who Should 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, keeping the monthly payments out of your budget capabilities.
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 is a method of utilizing the existing equity in your home to finance large projects that you might otherwise have to delay. Discover ®Home Loans offers home equity loans at competitive interest rates without application, origination, or appraisal fees, and no cash is required at closing. Funds can be used to pay for nearly any project and the interest is generally tax deductible (consult your tax advisor), making these loans very attractive financing options.
The equity in your home is calculated by finding the difference between what your home is worth and how much you currently owe. 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. Cash can be obtained through a loan secured by your home.
Current values are determined by recent home sales in your area. Real estate valuation sites like www.zillow.com 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.
Discover Home Loans offers home equity loans based in part, on your home’s combined loan-to-value (CLTV). Usually your CLTV, which includes your home equity loan plus your current mortgage balance divided by your home’s value, must be under 90 percent. Use our Loan Amount Calculator to see how much you may be able to borrow.
How Does A Home Equity Loan Work?
A home equity loan serves as a second mortgage on the home. You are able to leave the first mortgage in place without the expense of a refinance or losing the good interest rate you may have on that loan. The home equity loan will become a second lien on the home, and though it may not have as low a rate as the first mortgage, the rate can be very low compared to other lending options.
Examples of Home Equity Loans in Action
Jon used a home equity loan to pay off high interest credit card debt. He was able to convert the 18-25% interest rates he had on credit cards into ONE lower interest loan of less than 8%, reducing his monthly payments. The savings enabled him to pay off the debt in a little over five years, He chose the home equity loan over a line of credit because of the fixed payments and fixed interest rate.
Betty’s daughter was getting married and she needed access to funds to pay for the wedding. After establishing a budget, she and her spouse were able to get a home equity loan to cover the wedding costs. By taking out a lump sum in an installment loan, they had incentive to stick to the original budget and spend the funds wisely. Unlike with many home equity lines of credit (HELOCs), their home equity loan gave them a fixed interest rate that would not change for the life of the loan. They chose a loan term and monthly payment amount that was right for them, so that they could pay down the debt quickly.
When Should You Get a Home Equity Loan?
The above examples show a few common reasons homeowners choose a home equity loan over other types of financing. The interest rates are lower than unsecured options like credit cards, reducing the total costs of borrowing.
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. Smaller projects can utilize an equity line instead of a fixed loan when payments or expenses are spread out over a long period of time. When the expenses come all at once, an installment loan may be a better fit than a line of credit.
- Do you have credit card debt at high interest rates? One of the most common uses for a home equity loan is to pay off credit card debt. This lowers interest rates as well as the monthly payment.
- 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. Comparing initial loan costs, interest rate, and other terms of the loan that impact cost and loan term will help you make the best decision for your circumstances.
- How long do you plan to remain in your home? When you sell the house, the primary mortgage and the equity loan will be paid off. The answer to this question may impact the length of time you want to take out the loan. If you will not move anytime soon, then a longer loan term can keep payments low. A shorter loan term will recoup the equity faster, giving you more funds when the home is sold. If you will remain in the home, other long term financial projects may impact how quickly you want to pay the loan off.
Steps to Take Before Applying 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 Discover Home Loans monthly payment calculator to get an idea of your monthly payment.
- What are the fees and closing costs associated with the new loan? With some lenders, a second mortgage can come with fees such as an origination, appraisal. These fees can impact long term savings. However, Discover Home Loans does not charge such fees.
- Is your credit in good shape? Each year you can obtain a free copy of your credit report from www.annualcreditreport.com. Getting a copy from each of the three credit bureaus will allow you to correct any errors before applying. A loan officer can also review your credit report and score to prepare you for a smooth loan approval process.
- Determine how much you can potentially borrow from your home equity to meet your needs using Discover Home Loans calculator.