While the pandemic has created unique challenges in nearly every sector of the economy, the US housing market has surprised everyone with strong hold, and this pattern continues into 2021.
Recent data from the National Association of Realtors shows that from June 2020 to June 2021, the median price of existing single-family homes saw a near-record annual increase of 22.9%. Interest rates for many financial products continue to swing near record lows.
This has left many consumers wondering if now is the best time to access the equity that has accumulated in their homes over the past few years. If you have a lot of money trapped in your home, it’s smart to learn more about home equity products, how they work and how you can use them to reach specific financial goals. Let’s take a deeper look at home equity loans and why now might be a good time to consider one.
Similar to a mortgage, a real estate equity loan is a debt secured by the principal in your home or apartment. If you’re not familiar with the term equity, it’s the amount your home is currently worth, minus any debt it has in the form of a mortgage or other loans. A home equity loan is usually an additional debt on top of an existing mortgage.
When you take out a loan to buy a home, you borrow a fixed amount of cash and agree to pay it back within a specified period of time. Real estate equity loans also come with fixed interest rates and fixed monthly payments, so it’s easy to budget and plan.
Some people prefer to apply for a home purchase line of credit (also called a HELOC) rather than a home purchase loan. The basics are the same, but with a home purchase loan, you receive all the cash from the loan in one go, while with a home purchase line of credit, you don’t get cash up front, but you have a credit line available to draw on when you need it.
There can also be tax benefits with a home purchase loan or line of credit. While the rules have tightened in recent years, interest on a home equity loan or line of credit can be deducted if you’re using the money specifically for renovations or additions to your home. Home buying loans can give a huge advantage over many other types of debt.
Either way, because a home equity loan or line of credit is secured by the equity in your home, if you are unable to pay it back for any reason, the lender can foreclose a mortgage on your home to collect debts. So it is important to have a plan to pay off your home equity loan on time, and only accept as much debt as possible.
Click here to compare offers from real estate equity lenders at LendingTree, an online loan marketplace.
The first step in applying for a home loan is to have enough equity in your home to qualify. In general, most home equity lenders will only allow you to borrow up to 85% of your home’s total value between your mortgage and home equity loan.
For example, if your home is currently worth $400,000, you could owe a total of $340,000 on your mortgage and a home purchase loan. So, if you already owe $300,000 on your home, you may be eligible to withdraw another $40,000 from your home purchase loan.
Depending on your situation, it is likely that you will need to value your property to determine its value in today’s market. Your stock lender will usually facilitate this process, although an appraisal fee is usually required.
Your credit score is another factor that comes into play if you want to qualify for a home purchase loan. While each lender has its own qualification criteria, you will have the best chance of getting approved if your FICO score is at least “good” – i.e. 670 or higher. And you’re more likely to get the best rates and terms on a home purchase loan if your FICO score is “very good,” which is generally 740 and above.
Related: How to instantly improve your credit score for free with Experian Boost.
To qualify for a home purchase loan, you will also need to be able to demonstrate your ability to repay. You can usually do this by providing payment receipts or proof of any other continuous source of income you have, such as investments or self-employment income. If your home is owned by both you and your spouse, you must be able to use your combined income to qualify for a home purchase loan.
Finally, the real estate equity lender will take into account the debt-to-income ratio, which is how much debt you already have in relation to the income you bring in. In general, lenders prefer consumers with debt-to-income ratios of 43% or less.
Find out if you qualify for a home loan with LendingTree.
If you’re planning to cash out on your home so you can try your luck at the local casino, you should probably avoid taking out a home-buying loan – or any for that matter. However, there are many ways to use home purchase loans for a practical purpose, and even to save money in the long run.
Here are some of the situations where real estate equity loans can make sense:
- monotheismIf you’re tied into debt on a high-interest credit card or personal loan with a high interest rate, you may want to consider using a home equity loan to consolidate those debts. A home equity loan typically has a much lower interest rate than a credit card or personal loan, so you can save money on interest and pay off your debt at a fixed interest rate over a predetermined time frame.
- Home Improvements: Many consumers use home buying loans to pay for important projects such as remodeling a kitchen or adding a new room or flooring. The low fixed interest rates offered by home purchase loans can make this a good option.
- emergency expensesIf you don’t have the money to meet sudden emergency expenses, using a real estate equity loan can help you get the cash you need without having to pay an arm or a leg.
- college expensesMany people also use home purchase loans to partially cover college expenses, and to help their dependents avoid expensive student loans and long-term debt.
In general, since interest rates on home equity loans are more competitive than those on credit cards and other financial products, it may make sense to use a home equity loan if you qualify for a lower interest rate based on your credit score.
Related: How do you check your credit score?
Just remember that if you are consolidating debt from a credit card or personal loan into a loan to buy a home, you are replacing unsecured debt with secured debt. While you are likely to lower your interest in the process, if you don’t pay the money back, your home is at risk. Leaving your debt in an unsecured vehicle like a credit card eliminates that risk, although you can still suffer negative consequences if you don’t pay your debt, no matter what it looks like.
Save money with real estate equity loan offers through LendingTree.
Like other financial products, home equity loans often have fees that may not be obvious unless you look for them. According to the Federal Trade Commission (FTC), you may be required to pay an application or loan processing fee, as well as an origination fee of up to 5% of your loan amount.
It is also likely that you will need to pay for an appraisal to prove that your home has sufficient value to support the loan, and you may also face document preparation fees, registration fees, or broker fees as well. So it’s important to ask about fees up front and look for lenders that offer home purchase loans with very limited “extra” fees and closing costs.
If you are considering getting a home purchase loan, be sure to shop and compare lenders and their rates and fees. One way to do this is through an online marketplace like LendingTree, which offers the convenience of only having to submit your details once, and then getting offers from several lenders that you can compare and consider.
Check your rates now with LendingTree and see offers from many lenders.
A home equity loan can be attractive if you are looking for ways to borrow money, but there are also other ways to get cash if you need it. So before you hit the trigger for a home purchase loan, you should also consider the following:
A personal loan allows you to borrow a fixed amount of money with a fixed monthly payment and a fixed repayment term. However, personal loans are not backed by collateral, so you do not have to have a specific amount of equity or any other collateral for one use.
If you do not have a home, or if you do not have enough equity in your home or apartment to be able to take advantage of a home purchase loan, a personal loan may be a better option.
If you need to reach a credit line to make some purchases and don’t expect it to take more than a year to pay off your debt, you should consider a credit card with an introductory interest rate offer. Many of the best options allow you to earn rewards on your spending while enjoying zero or zero interest on purchases and balance transfers for 15 months or even longer.
Related: How to get the best credit card when you have an excellent credit score.
A credit card can be a valuable tool if you need to borrow a small amount of money and can pay it off relatively quickly. Just remember that you’ll pay a much higher APR on any remaining balances if you don’t pay them off in full before your card’s introductory offer expires, so don’t do this if you’re not sure you can pay off the debt in time.
Home Equity Lines of Credit (HELOC)
As mentioned earlier, a HELOC works similarly to a home equity loan where you borrow cash for the value in your home. But HELOC acts as a line of credit available whenever you need it, and you only pay back the money you get.
HELOC can be a better option if you prefer to borrow over time rather than a lump sum. HELOCs also come with variable interest rates like credit cards, although they are secured by collateral in your home. Like home purchase loans, HELOCs also limit your ability to borrow up to 85% of your home’s value.
Refinance your mortgage
Finally, don’t forget that it is possible to access the equity in your home by refinancing your mortgage. While this is generally a more complicated process than getting a home loan, the long-term interest savings can be worth it if you qualify for a lower interest rate or better loan terms.
When you refinance your mortgage, you are essentially replacing your existing mortgage with an entirely new mortgage, with an interest rate lower than the one you have. However, if you’ve already paid a significant portion of your mortgage, you may end up paying more interest overall, even with a lower rate. Fees are also required any time you refinance your mortgage, so be sure to sit down and calculate your total savings if you go this route.
Everyone’s situation is different, and a real estate equity loan will not be the right choice for everyone. But if you have unused equity in your home or apartment and want to take advantage of it without going through the hassle of refinancing your mortgage, a home equity loan is worth looking into. In particular, if you intend to use the proceeds to improve your home, the potential tax deduction for interest on home equity loans makes it an option to consider highly.
Learn more about refinancing with LendingTree and get offers from many lenders.
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