Second mortgages or home equity loans are getting popular once again. It fell back a bit after the recession, but as people are making moves now to take charge of their finances once again, interest in various loan options are picking up. If you want to find out more details about home equity loans and whether you might qualify for it, you’ve come to the right place.
How to Qualify for a Home Equity Loan
The first thing you need to be eligible for a home equity loan is that you need to have equity. In layman’s terms, this is the value of the portion of the home that you already own and paid for versus the portion that is still owned by the bank. The amount of your equity in this scenario is also known as your loan-to-value ratio – the balance that you still have to pay for compared to the total value of your property.
According to the report posted by credit.com on the Home Buying section of Fox Business, lenders generally want you to have a loan-to value ratio of at least 80% after your home equity loan. In other words, you will need a minimum of 20% ownership to qualify for this type of loan.
This applies as follows: If you have a $500,000 home and you want to qualify for a $50,000 home equity line of credit or home equity loan, you will need at least 30% equity, or a loan balance of no greater than $350,000.
2 Types of Home Equity Loans
Home equity loans have 2 types, a standard home equity loan and a HELOC or a home equity line of credit. In a HELOC, you can use up your loan in smaller increments very much like how you use your credit card’s credit limit. In a standard home equity loan, you borrow a lump sum and can’t borrow more than the set limit.
Both loans have specific terms and interest rates plus limits to until which you can borrow before having to pay it back. You can choose which of the two types of loans would suit you best based on the amount of money you need now and future ability to pay back.
Getting a Home Equity Loan
Most people who need a huge amount of money to pay for home renovations opt to get the lump sum type of home equity loan. It is also the second mortgage of choice for people who want to use their equity to consolidate debts. Consolidating debts is a smart way to use your home equity loan because the payments are much more manageable and the interest rates are not as high as credit card interest (although typically higher than your mortgage’s interest).
In comparison with the above, people with a variable need for funds favour getting a HELOC because it allows them to only borrow what they currently need until a certain limit is reached.
Keep in mind that no matter what type of second mortgage you choose to go for, it should be one that you are sure you can pay off. You also have to be fully informed of the risks and fully understand the terms you are getting yourself into before signing anything. This is the service that professional mortgage brokers give you – we make sure to look out for you so your loan will help you manage your finances, not cause you problems. Need a second mortgage? Contact us at Homebase Mortgages today!