Home equity loans can provide cash at a reasonable cost to qualified homeowners. Home equity financing usually offers interest rates lower than personal loans or credit card balance transfers. Here are four things to consider as you shop for home equity financing.
Loan-to-Value and Combined Loan-to-Value Ratios
Determine your home's loan-to-value (LTV) ratio by dividing the amount you owe on your mortgage by your home's value. The amount of your mortgage balance plus the additional amount you want to borrow is the combined LTV or CLTV. For example, John and Sue's home is worth $200,000. Their first mortgage balance is $100,000 and they want to borrow another $50,000 against their home equity. The LTV ratio is 50 percent ($100,000 / $200,000), and their CTLV equals 75 percent ($150,000 / $200,000).
Home Equity Is an Asset
Home equity is an asset like cash, but it's much less liquid. Keep a cushion of home equity in case you need to sell your home; otherwise, you'd have to bring money to the closing table to sell up and move. Falling home values caused many foreclosures during the recession; homeowners with problems paying their mortgages couldn't relieve them by selling their homes
Many home equity lenders set a maximum CLTV of 80-to-90 percent of your home's value. With a CLTV of 80 percent, John and Sue could take a home equity loan of $60,000 ($100,000 first mortgage plus a $60,000 home equity loan), because $160,000 is 80 percent of $200,000.
Home Equity Loan or HELOC?
A home equity loan delivers a lump sum at closing, and the borrower makes regular monthly payments until the loan is paid off. They can have fixed or adjustable rates. Home equity loans are great for one-time expenses like debt consolidation or the down payment on an investment property.
A home equity line of credit (HELOC) is open-ended; it can be used and re-used as needed. A HELOC is good for recurring expenses or as an emergency source of cash. Ongoing renovation projects, cash flow for a business and college tuition are good examples. Interest is charged only on amounts actually drawn. HELOCs are usually issued with adjustable rates; it's important to know how often a variable rate can adjust and by how much for any HELOC you're considering.
Home Equity Financing: Double Jeopardy in Hard Times?
Home equity lenders can foreclose on their loans for non-payment. They may also foreclose on a home equity loan or HELOC if payments aren't being made on a borrower's first mortgage. Understanding how this works in your state can help prevent an unwelcome surprise during a financial hardship.
Shop for Your Best Deal on Home Equity Financing
Request quotes from multiple home equity lenders to find competitive terms on home equity loans or HELOCs. Compare offers and choose the loan that best meets your needs.
Contact our network of home equity lenders to learn more about home equity loans and for free mortgage quotes.