Home equity is a lot of people’s most valuable asset. Your home equity is what you owe rather than what the bank owes. So, before you apply for a home equity loan, make sure you understand how they work.
Today, we’re going to walk you through the ins and outs of home equity loans. There are also many alternatives to pulling equity out of your home, so keep reading to learn more about how much equity you can borrow from your home!
What is home equity?
Home equity is the difference between what you owe on your house and your house’s selling price. Essentially, it’s the money that you walk away with after you sell the home.
Home equity usually grows over time as you pay down your mortgage, and oftentimes, your property will improve and gain value along the way. Home equity is significant when it comes to real estate investments, and you can monitor how your house’s equity grows over time.
How does a home equity loan work?
You can borrow on your home, but you should first understand how equity and equity loans work. For starters, you’ll have to have home equity in order to obtain a home equity loan.
If you paid a down payment for your house and you have been paying off your mortgage regularly, then you probably have money available for home equity. When you apply for a home equity loan from the bank, they will look at what you have paid off on your home mortgage.
Not only that, but they will also look at other important details, like the house’s market value. From there, the bank will offer you an amount that you are eligible to borrow.
How much equity can I borrow?
The amount of equity that you can borrow will vary based on your lender, but typically, banks allow you to borrow anywhere from 80% to 85% of your current home equity. This is considered your equity max.
Do you lose equity when you refinance?
It depends. People will often use their home equity to pay the closing costs on their homes when they refinance them. If you do this, you will lose that portion of your equity. But as you continue to pay off your mortgage, you will rebuild your lost equity. It may be worth it to lower your interest rate.
Things you should consider with home equity loans
It’s important to recognize that a Home Equity Line of Credit (HELOC) can be fairly risky under certain circumstances. Let’s take a look at a few of the factors worth considering before you seek out a home equity loan.
When to apply for an HELOC
HELOCs are a great tool under the right circumstances. Only apply for a HELOC if you are able to repay it. In other words, don’t get a HELOC if you do not have a steady and consistent income stream. This is a key detail because the penalty of not paying back a home equity loan is the loss of your house.
Can help pay off a large purchase
You can use a home equity loan to pay off a large purchase that you put on a credit card. Ideally, this would create more equity, like a new roof or a full-blown remodel. This way, you can grow the investments you make towards your house over time.
A cycle of borrowing and debt
HELOCs can create a cycle of debt. This happens when people use their home equity loans as a quick fix without having a steady income stream that allows them to pay back their HELOC. Don’t fall into the trap of debt by using home equity loans as a short-term solution.
Shopping around for the best deal
Just like any loan, shop around for the best deal so that you don’t end up overpaying in terms of interest on your HELOC. This can really eat into your savings and home equity, so avoid it at all costs.
HELOCs can be used on second homes
You can get a home equity loan on a second home. It’s a way by which people acquire multiple properties for investment purposes, even when they don’t have the money to do so. You can leverage the equity of one property in favor of another. This strategy can help you put a down payment towards multiple properties.
Advantages of a home equity loan
The most significant advantage of a home equity loan is the ability to use the money you have in your house right now. Under the right circumstances, it can open more doors for you financially as well. Need to make a big purchase? A home equity loan can help!
Disadvantages of a home equity loan
Home equity loans aren’t for everyone. People often search for ways to get cash fast when they become desperate, but your home is your most important asset. Don’t trade it without thinking the decision through. If you can’t repay your home equity loan, then you could end up losing your home. Home equity loans aren’t right for someone who doesn’t have a steady and consistent income source because you won’t be able to repay it in the long run.
Home equity vs cash-out refinance
Cash-out refinances refer to situations where you refinance your mortgage for an additional amount of money. For example, let’s say you want to complete a $50,000 kitchen remodel. You can refinance your mortgage to include the extra $50,000. That way, you’ll receive the cash on top of your new mortgage. But remember that your new mortgage will have its own set of terms and conditions.
3 home equity alternatives
Do you want to pay off your bills with a home equity loan but you found out you don’t qualify for one? Try these alternatives instead!
Credit Builder loans from MoneyLion
Are you having trouble qualifying for a loan? Try a Credit Builder loan from MoneyLion instead. Our Credit Builder program makes it easy for you to build credit. Simply set up an account and pay off your loan over the course of twelve months.
We’ll store your loan in an account under your name, and you can access the account after you pay back your loan. Meanwhile, we’ll also report your excellent on-time payments to the major credit reporting bureaus. Once you have paid off the loan, you’ll receive the remainder of your money. Additionally, your credit score will improve in the process–some members have noticed up to 60 point increase within 60 days!
Cash-out refinancing rolls a loan into the mortgage refinancing process. If you are able to qualify for a mortgage, then you are likely eligible for a slightly larger mortgage as well.
Credit card cash advances
Always read the fine print when you’re looking at credit card cash advances. Even though cash advances are easy ways to get money fast, reading the terms and conditions is very important. Luckily, you don’t have to leverage the ownership of your entire home when you get a credit card cash advance.
A better way to get money–fast!
A home equity loan can help the right people at the right moment, but it’s not your only option. Our Safety Net feature is an excellent choice when those expensive emergencies pop up out of nowhere. Safety Net lets you borrow money in a pinch. Set up your RoarMoney direct deposit and get started today!