A home equity loan, also known as a second mortgage, allows homeowners to borrow against the equity in their home as opposed to applying for a traditional loan when they need money. If you need funds quickly for a large expense and you own a home, you may want to consider looking into an equity loan.
Determining whether a home equity loan is right for you may depend on your personal circumstances, but it's always best to be educated about any type of loan before you apply.
8 Important Things You Need to Know Before Getting a Home Equity Loan
You Need Equity
It may be obvious, but you'll need to own a certain percentage of your home before you can successfully receive a home equity loan. It's best to have at least 20-30 percent of equity in your home.
There are Two Different Types of Loans
A home equity loan can often be compared to a second mortgage because it allows you to receive a large loan for a certain repayment period and interest rate. Home equity loans are often used for large one-time expenses, like a home remodel, and the funds are disbursed to you all at once.
If you need smaller amounts of money or aren't positive how much you will need to borrow overall, you can opt to take out a home equity line of credit or a HELOC. This type of equity loan allows you to withdraw smaller amounts of cash as you need it as opposed to receiving a lump sum.
You Could Receive a Fixed or Variable Rate
Interest should play a huge role in what type of equity loan you choose. It's important to realize that your interest rate could be fixed or variable. When industry rates are low, it sounds like the best option would be to lock in a fixed interest rate.
On the other hand, a variable interest rate might depend on the market more and affect how much your loan payment will be each month. However, by law, variable-rate plans secured by a home must have a maximum controllable limit to how high the interest rate can increase over the life of the loan, according to Consumer Finance.
You'll Need Good Credit
Whether you decide to get a fixed or variable interest rate with your loan, the rate will depend heavily on your credit. Lenders for home equity loans like to see applicants with good credit scores preferably in the 700s.
If you credit is average or low, you might still qualify for a loan, but you will have a much higher interest rate and as a result pay more on your loan over time. Check your credit score and work on improving it before you apply for a loan.
You Could Lose Your Home If You Don't Pay it Back
With most home equity loans, you have to use your home as collateral so the bank will have more reassurance that you are going to pay the loan back.
With traditional loans, if you encounter hard times you can look to solutions like consolidation or even taking a hit to your credit. With an equity loan however, if you can't pay back the loan on time for any reason, you could very well lose your home, so it's best to keep that in mind before and only apply for a loan if you know without a doubt that you'll be able to pay it back on time.
If you Receive a Loan, You Probably Shouldn't Sell Your Home Anytime Soon
If you borrow against the equity in your home, you should plan on sticking around for a while or at least until you've paid the loan off. If you decide to sell your home when you still owe money on the loan you took out, that balance can be due ASAP.
Different lenders have different guidelines. If you are even considering moving in a few years or so, make sure you discuss your options regarding a home equity loan with a professional to determine if it would be right for you.
Be Prepared to Pay Fees
When you take out a home equity line of credit, you will have to pay for many of the same expenses as you did when you took out your mortgage. Some fees or 'closing costs' to consider include: the application fee, appraisal, title search and attorney's fees.
If you are planning to take out an equity loan, try to set money aside for these expenses ahead of time so you don't have to finance them during the loan process.
There's a Three Day Cancellation Rule
After you sign a home equity loan agreement, according to the Federal Trade Commission, you have three days after you sign the loan to reconsider and cancel without receiving a penalty. This could be useful in a case that you change your mind at the last minute or your circumstances suddenly change.
According to the rule, you have the right to cancel penalty-free until midnight on the third business day after signing and submitting the contract and receiving the Truth in Lending notice explaining your right to cancel.
Compare and Learn More
Keep these eight facts in mind as you consider getting a home equity loan. Once you determine that you qualify, start comparing home equity loan rates and terms to see what best suits your situation. You might want to ask questions to help estimate and prepare for closing costs, and to make an educated final decision.
Knowing your rights and resources along with what to expect can be a powerful tool when it comes to securing the right home equity loan