A home equity loan enables you to borrow money by using your home as a down payment or assurance. This offers you a huge sum of loan and repayment comes with a fixed-rate interest based on the predetermined term. Home equity loans stand as one of the factors to known as worthy your home is. But the risk is that, since you’re using your home as assurance or collateral for equity, failure to repay your loan could risk you losing your home. Therefore, if choose to take out a home equity loan, there are certain things you need to know.

Home Equity Loans - How do home equity loans work, requirements
Home Equity Loans – How do home equity loans work, requirements

What is Home Equity Loan?

A home equity loan can be referred to as an equity loan, home equity installation loan or second mortgage loan serves as a type of loan where you receive cash in form of a massive payment. Simply, you can say it is a type of customer debt. To repay the loan include a fixed interest rate, but depends on if you have enough equity.

As for equity, it is the difference between the worth of your home and the amount of mortgage you’re owing. A regular payment or down payment of your mortgage is one factor that helps to increase or grow your home equity. Most important when real estate value increase in your area, the makes your equity grow even faster.

How does home equity loans work?

Home equity loans work like every other loan, but even more than what other types of loans will offer you. When you apply for a home equity loan, you’ll receive a lump sum of money at once. However, your equity serves as collateral for the lender which might include your home. The amount of money you can borrow actually depends on certain factors that include a combined loan to value (CLTV) ratio of about 80% to 90% of the value of your home.

Traditional home equity loans come with a repayment term similar to conventional mortgages. Repayment of a loan includes a regular and fixed payment to cover up both the principal and interest. Similar to other loans, if you don’t repay your loans, the house you use as collateral will be sold to clear off the remaining debt.

How much can you borrow with a home equity loan?

Just like I stated earlier, the amount you can borrow with a home equity loan is determined by the CLTV ratio which is about 80% to 90% of the home worth value. This will be minus the amount you own on your mortgage. You can perform the calculation to estimate how much you can be able to borrow with a home equity loan.

Requirements for Home Equity Loan

The requirement or qualification to apply for a home equity loan actually depends on the lender. Each lender has different qualification requirements that you need to have. Generally, here is the following requirement you might be asked of:

  • Home equity of at least 15% to 20%.
  • Have a good or excellent credit score of about 620 or higher.
  • Debt-to-income ratio of 43% or lower.

Also, in other for the confirmation of your home value in market value, your lender might request for an appraisal to determine the approval for how much you want to borrow or are eligible to borrow.

Is home equity loans worth it?

However, if you’re thinking about whether home equity loans are worth it or if it’s a good idea. However, this depends on you and also your financial situation. Your home is used as collateral and failure to pay it back, you risk losing your home to pay off your debt.