A home equity home is basically borrowing against money your house has in value. Its a pile of cash you didn’t know you had — the value built into your home. You can access a portion of that appreciation with a home equity loan, using your property as collateral.
To qualify for a home equity loan, you first need home equity. You have equity when your home’s value is higher than what you owe on the mortgage.
And the more equity you have, the more you should be able to borrow.
How much money can you get from a home equity loan?
A home equity loan generally allows you to borrow around 80% to 85% of your home’s value, minus what you owe on your mortgage.
Here’s how to get a rough estimate of the amount you may be able to borrow (or just let our home equity calculator on the right side bar do the math for you):
Let’s say your home is worth $350,000, your mortgage balance is $200,000 and your lender will allow you to borrow up to 80% of your home’s value.
$350,000 x 80% = $280,000
$280,000 – $200,000 = $80,000 (possible loan amount)
THINKING ABOUT A HOME EQUITY LOAN?
Home equity loans can be a great way to finance your home improvements. NerdWallet helps you easily see how much equity you have available.CHECK YOUR HOME EQUITY
How you get your money with a home equity loan
A home equity loan gives you money all at once. If you know how much money you’ll need and when you’ll need it — for a remodeling project with a fixed budget, for example — it may be the right choice.
This home equity loan, which is a second mortgage, is structured much like your purchase mortgage: You’ll repay this loan — principal and interest each month — at a fixed rate over a set number of years.
You can get a fixed interest rate and know that, at the end, you’re going to have a zero balance.
“You can get a fixed interest rate and know that, at the end, you’re going to have a zero balance,” says Carlos Miramontez, vice president of mortgage lending at Orange County’s Credit Union in California.
With a home equity loan, you could encounter a minimum loan requirement, which typically ranges from $10,000 to $25,000, according to Miramontez.
Home equity loan pros:
- Fixed rates provide predictable payments, which makes budgeting easier.
- Lower interest rates than a personal loan or credit card.
- Quicker close times than for a cash-out refinance.
- If your current mortgage rate is low, you don’t have to give that up.
Home equity loan cons:
- Less flexibility than a home equity line of credit (HELOC).
- You’ll pay interest on the entire loan amount, even if you’re using it incrementally, such as for an ongoing remodeling project.
- More lenders are offering HELOCs than home equity lump sum loans.
- Home equity of at least 15% to 20%, usually confirmed by an appraisal.
- A credit score of 620 or higher.
- Debt-to-income ratio of 43%, or possibly up to 50% (calculate your DTI).
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