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Homeowners looking to leverage capital in their home may now find it a little easier to obtain equity loan or equity line of credit (HELOC) compared to last year. In the midst of the COVID-19 pandemic, many banks in the US announced they no longer offer home equity products. But with the rise in house prices across the country, the situation is changing.
“Even though rates were low during the pandemic, getting a home loan was a challenge because lenders tightened income and property requirements,” says Fred Glick, CEO Arrivva, real estate company. “It’s getting better now.”
If you are interested in a home equity loan or HELOC, make sure you have invested in your home, your loan is in good shape and you are ready to repay the loan.
Although the names are similar, real estate loans and HELOC are different financial products. While they both use your home as collateral, the choice between the two depends on how you plan to use the funds.
Before taking out a secured home loan, it is important to understand some of the advantages and potential disadvantages. Read on to find out more.
What is a home equity loan and equity line of credit (HELOC)?
While both are similar, there are some differences. Be aware that both can put you at risk of foreclosure if you don’t return it to the lender.
Loans secured by real estate distributed as a lump sum that you pay back to the lender with fixed monthly payments. Think of it like second mortgage in your house. Home equity loans have a fixed interest rate, which means that the rate does not change. They may also be tax-free, depending on how you use them.
A HELOC acts like a credit card, so you can use the funds anytime. As the balance is paid out, the available balance is replenished. Exists draw period where you can withdraw funds, after which there will be a redemption period when you no longer have access to funds.
Borrowing requirements from equity
To borrow from you equity, there must be enough capital in your home. To qualify, you must already pay at least 15–20% of the value of your home — for example, $ 100,000 if your home is valued at $ 500,000. As part of this process, the lender will assess the value of your home at your expense.
“Equity is the difference between the appraised value of a home and the total balance of the mortgage,” says Samuel Eberts, junior partner and financial advisor to the company. Dugan Brown, a pension company.
Lenders will also keep track of your debt-to-income ratio (DTI), which is calculated by dividing your total monthly debt payments by your gross monthly income. Qualifying DTIs vary from lender to lender, but they are usually less than 36%, meaning your debt should be less than 36% of your monthly gross income. Other lenders go up to 50%. Lenders will also study credit history. Having a credit rating above 700 will be enough to be accepted; a credit rating in the middle of 600 can be accepted. A good credit rating is important because it will help you get a higher interest rate.
To prove you have income, be prepared to provide pay stubs and possibly W2 and tax returns.
Should you get a home equity loan or HELOC?
Before decision-making Between a secured real estate loan and a HELOC, it is important to understand how much money you need and for how long.
“If you are not sure how much money you need for what you are going to accomplish by taking a line of credit, [HELOC] will provide more flexibility than credit. The downside to this is that interest rates can go up and you can get stuck paying rates, but you have to make recurring mortgage payments at the same time, ”says Eberts.
Whatever decision you make, make payments. Since your home is being used as collateral, you do not want to risk foreclosure.
Alternatives to Home Loans and HELOC
If you don’t like the idea of using your home as collateral for a loan, there are other ways to achieve your financial goals. Here are a few more options:
- Refinancing when cashing out: Refinancing with a cash advance is when you refinance your main mortgage for more than your debt and receive the difference as a lump sum. “If you qualify for lower rates with cash out financing planthis could be a great idea, ”says Ahil Kumar, VP and Chief Commercial Officer Arch Global Advisors, a financial consulting company.
- Credit card for balance transfer: If you have good credit, you can qualify for a balance transfer card with an annual interest rate of 0%. It offers you the ability to transfer any debt to a card with a 0% interest rate, sometimes for 18 months. This gives you the opportunity to make a large purchase and pay it back over time with zero interest. Just remember to pay it before the end of the advertising period, otherwise you will pay interest on the remaining balance.
- Credit counseling: If you have trouble keeping to budget and paying off debt, or if you have a financial goal that you want to strive for, you can seek help from a nonprofit credit advisory agency. You will receive educational tools to help you manage your money. It gives you control over your financial health and helps you make better decisions in the future. Find a loan advisor by searching the US Trustee Program. database here…
Requirements for frequently asked questions
Can I get a home loan without a job?
Unlikely. Lenders will be wary of how you can repay the loan. “But just because someone doesn’t have a job doesn’t mean they don’t have a source of income. Sources of unemployed income that may qualify you for a loan include pensions, Social Security retirement benefits, disability benefits and investment income, ”says Eberts.
Are there any restrictions on how I can use home loan funds?
The funds received through a home loan or HELOC can be used for almost any purpose, such as buying a new car, paying for a child’s education, or vacationing. Funds can also be used to repair the person’s main place of residence.
How much does it cost to close a home equity loan or HELOC?
The average closing cost is usually between 2% and 5% of the total amount of the loan or line of credit. Sometimes the lender may offer “free” HELOCs or home equity loans; however, they may have already added it to the interest rate on your loan, so always double-check if you are unsure. The closing cost includes lender fees and third-party services and includes things like appraisal, title insurance policy, and settlement fees, among others.
Can I shop for better terms and less closing costs?
Definitely. “Your best bet is to look and compare lenders, and things like terms and rates,” says Kumar. “Plus, if you refinance, your final costs will often be lower.” Finally, before applying for home equity financing, if you are working to improve your credit rating, you may qualify for better terms, including lower closing costs. In general, it is in your best interest to always research the options available before deciding what is best for you and your family.