Before Getting a Home Equity Loan

Before Getting a Home Equity Loan

What People Wish They Know before Getting a Home Equity Loan

The equity of your home is a measure of the market value of your property. This is a numerical representation of how much of your home has already been paid for. Your home equity can be used for a variety of purposes. A home equity loan is one of the most important of these things.

The value of your equity can help you in getting a good home equity loan. If you’re considering getting that type of loan, then it is vital to understand equity.

What is equity?

As we mentioned earlier, the equity of your house represents the amount that you have already paid for. This value shows how much of the total cost for the house has been funded by you. It may be a tad difficult to grasp, so take a $100,000 house as an example.

You were interested in this $100,000 home, so you bought it using $20,000 as a down payment. You borrowed the remaining $80,000 as a loan. In this case, the equity is 20% since you have only actually funded 20% of the payment. Time passed by, and you paid the bank another $20,000 for the loan that you took out. Your home equity then increases to 40% since you have already funded 40% of the total payment.

Suppose that the market value of your house increased while you still owe the bank. The amount you owe them for the loan stays the same but your equity increases. This is because the amount you already paid, for now, has more value. However, you won’t have to pay the bank that difference. All you have to worry about is the amount you originally owed them.

What does equity have to do with the home loan?

A home equity loan will use the value of your home equity as collateral. Your home equity is a good indicator of your ability to pay. This means that the better your equity, the higher the chances of you getting better rates for the home equity loan.

With these being said, you can use a home equity loan for a variety of purposes. You can use the money that you borrow to fund many things. Make sure that you have good credit and high equity to get the best rates.

Types of home equity loans

There are 2 types of home equity loans. These are the following:

  1. Closed-end loan: A closed-end loan gives you a set amount of money upon borrowing. This is great for one-time expenses or ones where you already have a set amount in mind.
  2. Open-end loan: An open-end opens up a credit line between you and the lender. You can borrow money until the maximum limit over a period of time. This is the loan type to get if you need a constant supply of cash. A good example would be funding for your children’s college education.

Keep all these in mind if you are thinking of getting a home equity loan. Make sure that your credit and home equity are good. These can assure great rates for the loan.

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