Meta Description: Home equity loans allow homeowners to borrow money against their home's equity value. Click here to find out all you need to know about a home equity loan.

Whether it is to buy a new property or pay for an unexpected medical bill, you may need a cash infusion at some point in your life. If you don’t have a cash reserve to pull from, then a home equity loan might be the way out.

Read through to learn everything you need to know about home equity loans, how to qualify for them, and what they can be used for.

What Is A Home Equity Loan?

A home equity loan allows you to borrow a sum of money by leveraging your home equity. Your home equity is the difference between the value of your home and how much you still owe on your mortgage.

You can use a home equity loan to pay for anything – there are no restrictions, unlike a mortgage which can only be used to purchase a property. Most people use them to pay for significant expenses like tuition, renovations, or medical bills.

How Much Can You Borrow?

The amount of money you can borrow with a home equity loan is mostly determined by the amount of equity you have in your home. Your home equity is the difference between the value of your home and the amount you owe on the mortgage. You can use this formula to compute it:

Home equity = Appraised value of your property - (Remaining principal - other liens)

Most lenders will only lend you 75-90% of your present home equity. Let’s say your home is valued at $400,000 and you still owe $250,000 on your mortgage. That means your home equity is $150,000. If your lender allows you to borrow only 80% of your equity, then you can borrow up to $120,000.

What You Need For A Home Equity Loan

The specific requirements for a home equity loan depend on the lender. But here is a list of things that lenders generally lookout for.

Equity

To qualify for a home equity loan, you must own your property outright and have at least 15% to 20% equity.

When To Consider A Home Equity Loan

A home equity loan may be the best solution in some situations, such as:

• You have a lot of equity: If you have a lot of equity in your house, you could borrow more than what other loan types will allow.

• You don't have a great credit rating: Because a home equity loan is a secured loan, it may be simpler for persons with bad credit to qualify. It might come with a higher rate, though.

• You have major expenses to cover: Home equity loans pay out a lump sum, which makes them a fantastic option for large expenses like renovations, tuition, or big purchases. Many people also use home equity loans to consolidate debt like student loans.

Pros And Cons Of Home Equity Loans

If you’re planning to take a home equity loan, knowing the disadvantages and advantages could help you decide whether this is the best thing for you to do. Below are some things you need to take into consideration:

Pros

Fixed Monthly Payments And Repayment Terms

Home equity loans often come with fixed monthly payments. This means that you’ll know exactly how much you'll have to pay each month and when you'll be able to pay off your debt. Your payment amount will also be consistent each month, so it’s much easier to budget.

Low-Interest Rates

Because home equity loans are secured, they usually have lower interest rates than other types of loans, such as personal loans.

No Restrictions On What You Can Use It For

Unlike mortgages which can only be used to purchase property, you can put your home equity loan towards anything you want. This includes a new car, medical bills, or college tuition.

Cons

High Risk

Using your home as collateral is risky. If you fail to pay up your debt, the lender has the right to take your home. Only take a home equity loan if you’re willing to take the risk or if you’re sure that you can pay it off.

Fees And Closing Costs

With a home equity loan – just as with any mortgage – you have to pay closing costs, which typically range between 2% and 5% of the loan amount. There may be other fees as well, such as appraisal fees, origination fees, or an early termination fee if you pay off your mortgage before the agreed-upon date.

Taking On Debt

Even though you might really need a home equity loan, it’s still debt. Keep in mind that you’re paying off your regular mortgage on top of your home equity loan – make sure you can afford both before taking on new, major financial obligations.

Home Equity Line Of Credit (HELOC) vs Home Equity Loan

When a homeowner takes out a home equity loan, the lender gives the borrower the whole loan at once, with a set interest rate. The borrower must make monthly interest payments on the total loan amount for an agreed loan term, just like other traditional loans.

On the other hand, instead of receiving a flat sum, a homeowner with a HELOC is approved for a certain amount of credit. The borrower can withdraw funds from the line of credit as needed during the draw term, and they are only responsible for paying interest on their withdrawals. Unlike home equity loans, HELOC interest rates are not fixed.

Conclusion

While taking a home equity loan can be helpful, borrowers should also be cautious. If too much equity is taken out on a mortgage, it is easy to end up underwater and get your home foreclosed.

After assessing the risk and cost of taking a home equity loan, if you decide to go ahead with it, the next step will be to look for a reliable lender to work with. If you’re confused about what lender to get your home equity loan from, contact Wesley Financial Group to learn about your options!