The home equity loan is when the borrower uses the home equity as collateral for a loan. The property value determines the loan amount. A professional appraiser determines the value. This loan is taken by the homeowner usually for a major repair, medical bill or college education expense. This loan is taken against the value of the home and in fact, reduces the value/equity of the house. These loans require that you have a good credit history, reasonable loan to value (of the house) and combined loan to value ratios. There are two types of home equity loans, a closed end which is called a home equity loan and the other open end which is a home-equity line of credit. These are also called second mortgages (secured against the value of the house).
The home equity loans can be considered as the person’s main mortgage. You cannot purchase a home using this loan or refinance. In most cases, the home equity loan interest can be deducted from the personal income tax. The home equity loan is a one-time credit given in lump sum at a fixed rate of interest. A list of fees that may be applicable for home equity loans is appraisal fees, originator fees, title fees, stamp duties, arrangement fees, closing fees, early payoff fee, inactivity fee, annual or membership fee. The surveyor, conveyor or valuation fees may also apply. This cost is reduced if you find your surveyor. The title charges for equity loans are often fees to renew the title information. Make sure you read every detail and ask questions about the fees that are charged. The home equity loan is a great way to consolidate your debt or pay for major expenses. They give you a security of making fixed-rate payments on the principal and interest for the life of the loan. You may have to pay closing fees unless you pay off your loan early. There may be additional fees which may be applied depending on the lender. Home equity loans are not to be spent lightly; they deplete something you have built over the years. There are risks involved if you do not pay your loan you may face the risk of losing the home. A home equity loan is a good choice if you need money at once. It has a set rate of interest and payment over the term, and it never fluctuates. But you cannot borrow any more in the future.
Eligibility criteria for home equity loans-
- To be eligible, your loan-to-value ratio (LTV) is achieved by dividing the amount you owe by the appraised value of your property. The loan companies prefer that this number should not exceed 80%.
- Lenders also look for the equity amount you have acquired they weigh that against the loan amount you want. Most companies lend between 80 to 90% of your homes total equity.
- They also look at the credit score and debt-to-income ratio (DTI). Most of the companies require a good-to-excellent score; with the average of them require a minimum FICO score of 660 to 700. Many companies accept lower FICO scores. The average DTI is 40%, but each company has its requirement. It is at their discretion they accept applicants outside their set parameters.
Majority of the lenders have an online application form, which they use to determine your eligibility and if you qualify for a home equity loan they ask for more information, documents, income, mortgage proof and employment proof. If you want simple process then Wells Fargo, TD Bank, and Third Federal are good as they have a quick underwriting turnaround time and make funds immediately available once you close your loan. Third Federal is a good choice for rates and fees. Its interest rates are lower than other companies, and it has a variable rate cap, and they do not have any application fees, early-payoff or closing fees. It is best to shop around to find a loan that offers the best rates, that fits what you are looking for, and it offers a repayment calendar that you can manage.
Listed below are five tips to get the best home equity loans-
- Shop around
Check with your existing lender but shop around for the best deals. Even a small difference, makes for a huge one when you have to pay off your loan. Use the rate finding tools and compare rates directly. Check banks, credit unions, and other financial investors. - Solidify finances
A good credit score affects your rate of interest; an excellent score gets you a low APR while an average score will get you a higher rate. A low credit score will keep you from getting home equity loans. - Interest rates
Compare the APRs on fixed-rate home equity loans. - Compare Fees
Ask for a full list of fees that can add over 6% of your loan. - Fixed-rate HELOCs
If you wish to have a fixed-rate home equity loans with a flexibility of a HELOC, some lender may allow you to borrow a certain amount for a certain period. Once paid that amount is added to HELOC again. This may have a higher interest rate for that period.
