If you’re wondering how to fund a renovation or other house project, you might be considering a home equity loan.
One in four mortgaged properties in the U.S. is equity rich in 2020, making it a great time to take advantage of home equity. Keep reading to find out what you need to know first.
What is Home Equity?
Equity in a home simply refers to the difference between the value of a home and the amount still owed on the mortgage. For example, if your home is worth $350,000 and your remaining mortgage amount is $250,000, you have $100,000 in home equity. You can increase the amount of equity by paying down the mortgage or by increasing the value of your home. Local real estate can have an impact on home value, such an increase in demand for housing outpacing the supply. Improvements and upgrades to the property are another way to increase home value, but it takes some funds to do this.
A Loan Versus a Line of Credit
A home equity loan is also sometimes called a second mortgage. Using the home’s equity as collateral, you can take out a loan for a lump-sum of money, which is then repaid at a fixed rate over a predetermined number of years. These payments include principal and interest, just like the primary home mortgage. A HELOC, which stands for Home Equity Line of Credit, is different in that you can borrow money as you need it, repaying as you go, much like a credit card. You’ll pay interest on this type of loan, too, but the rate is variable rather than fixed. To qualify for the loan, you’ll likely need to meet some requirements, such as a home equity value of at least 15 to 20%, a credit score of 620 or higher, and a debt-to-income ratio of 43% or lower. You can get a good idea of the maximum loan amount by using an online calculator.
Pros and Cons
Using your home as collateral is a significant risk because defaulting or missing payments on the loan could mean losing your house. Here are some pros and cons to consider:
- It’s possible to get a lower interest rate than that of a credit card or personal loan
- It does not affect your current mortgage interest rate
- The interest could be deductible if the money is used for house renovations and improvements
- Fixed rates make it easy to plan and budget, as payments are predictable
- Payments will be for the total amount of the loan, including interest, even if you’re using the funds incrementally
- Less flexible than a line of credit
- Missed or late payments could cause you to lose your home
- If you sell your home before you’ve paid back the loan, the balance of the loan is due
Sell Your OKC Home Can Help
Instead of taking out a home equity loan, it may make more sense for you to sell your house. Regardless of the repairs or improvements your home may need, Sell Your OKC Home will make you an offer and sell your home quickly. If you live in Oklahoma City, Oklahoma, or the surrounding area, contact us and see how we can help you close on your home in just 14 days.