Tips on Finding the Right Home Equity Loan
What should homeowners understand before taking out a home equity loan?
A home equity loan is one way of taking equity out of your home. It may not be the best way, depending on what your interest rate is on your first mortgage and what the closing costs will be. You always need to figure out if the total payments for the first and second will be lower than just doing a cash-out refinance. You must also look at how much cash you want to take out of your house. If it is going to be more than 80% of your value, then you need to stick with a home equity loan or a HELOC.
How can potential borrowers assess their current level of equity?
The easiest way is to go to a website like Zillow, Redfin, Realtor.com or any other website that will give you an idea of what your home’s value is. These websites use AVM (Automated Valuation Method) to determine your home’s value. AVM is done by finding comparable sales in your area and averaging them. They have to be similar in type, square footage, number of bedrooms, baths, garages, etc.
Remember that this is not an appraisal, but it will give you a good idea of your value. After determining your value, you need to subtract the current mortgage balance to tell you how much equity you have. You will not be able to get all the equity out of your house. A cash-out refinance will allow you to use 80% of your equity. A home equity loan, or HELOC, may allow you to use up to 95% of your equity. Calculating how much equity you can use in a loan is as follows: The value of a home is $400,000. Only able to use 80% of equity. Take 80% of $400,000, which equals $320,000. Now subtract the mortgage balance of $250,000, which will leave you with $70,000 in equity available to take out.
How does a consumer shop for a home equity loan? Should you apply with multiple companies at the same time?
You can shop online and get some idea of rates and costs. You can also go to your local bank, which will have very limited products. A mortgage broker will often have access to numerous types of equity loans. There is nothing wrong with talking to multiple companies, but do not apply to multiple companies simultaneously. If you get turned down by one company, then you should go on to the next.
What are some common misconceptions about the use of home equity in loans?
Rates are very high, but they will be lower compared to an unsecured loan. If you take out a HELOC, you must take all of the money at closing. You can close on a HELOC and not take out any money at closing. People think a HELOC, or home equity loan, is only for large expenses. You can use them to pay off high-interest credit cards, automobiles, tuition, vacations, etc. The process takes a long time. It is not true that a HELOC can be done in 1-2 weeks.
What are the pros and cons of a home equity loan or HELOC compared to an unsecured personal loan?
Pros: With an unsecured loan, you can get really fast; you do not need to own a home, and the costs are very low.
Cons: unsecured loan rates are very high; you cannot get a large loan like a HELOC or home equity loan.
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