Your home is more than just a secure place for you to enjoy spending time with your family. It is key to a secure financial future, allowing you some access to funding in the event that you need it. Did you know that you can use part or your entire stake in your home to secure a loan? This is called a home equity loan, and it can be accessed by homeowners who have already made significant payments on their mortgage.
When taking a home equity loan, your property is held as the security in case of a default. Equity refers to the value of your stake in your home, which may be calculated by finding the difference between the market value of your home and the amount owed on your mortgage. In the event that you are unable to pay your mortgage, it will be the value you would still hold in your home. Since the loan is secure, your credit score will not usually hold significant value to your application.
How do you calculate your home equity loan value?
The terms of your home equity loan will depend on your lender. Most lenders will have a minimum loan amount, with a fixed interest and a specific repayment period that can range between 5 to 15 years. The maximum amount lenders are willing to offer homeowners will depend on their loan to value ratio, which is calculated by dividing the mortgage amount due with your home’s current appraised value. For instance, if your home appraisal determines that the value of your home is $500,000 and your pending mortgage is $300,000 your loan to value ratio would be 60%. If your lender allows up to 75% of your LTV, you would be able to access $45,000 in home equity loans.
How to access a home equity loan
There are no specific terms for homeowners to access a home equity loan. Different lenders will place specific requirements based on their policies. However, you will be able to access a home equity loan if you have a stable source of income such as employment, and hold at least 20% equity in your home.
You are also more likely to access the loan if you have a great credit history. Lenders will be wary of borrowers who generally do not pay their bills on time. If you have a credit score lower than 620, you may also have a hard time accessing this loan even if you have substantial home equity.
Your credit rating could help determine your ability to get different types of loans, including a home equity loan. Even if you have your loan application accepted, you may be unable to access great terms on your loan. It could make the loan potentially more expensive, which could reduce its value and impact your ability to pay. You could consider a line of credit such as HELOC, which would reduce the risk of losing your home if you are unable to pay.