Home equity is the appraised value of a home minus any outstanding mortgage and loan balances. A home equity loan is a great way to access cash for a home improvement project or repair, to consolidate debt, or for any large or emergency expense. Comparing home equity loans is important in finding the best lender for your needs.
Calculating your home equity
To calculate your home equity, simply subtract your mortgage balance from your home’s current market value. If you have any other debts secured by your home, subtract that total as well. Lenders typically require you have at least 15 to 20 percent equity in your home to be eligible for a home equity loan. If you have the necessary equity built, a lender will generally allow you to borrow about 80 to 85 percent. Some lenders, such as Guthrie Community Credit Union, enable you to borrow more. In fact, they allow you to borrow up to 100% of your home’s value less any existing mortgage balance, based on creditworthiness.
Benefits of a home equity loan
A home equity loan can be a cost-effective way to secure a large amount for home improvement, debt consolidation, education expense, or any reason. They typically provide a borrower with a lower interest rate than an unsecured debt, such as a personal loan or credit card. The savings on interest can be a big benefit. There may be a tax benefit to a home equity loan as well when it is used for a specific purpose. According to the IRS, the interest paid on a home equity loan is tax-deductible if it is used to buy, build, or substantially improve the taxpayer’s home that secures the loan. Speak to your tax advisor regarding your specific situation.
Comparing home equity loan lenders
When shopping for a home equity loan, rates and fees should be at the top of your list for comparison. The home equity loan interest rate will be expressed as an APR, which is short for the Annual Percentage Rate. It is the yearly interest generated by a sum that’s charged to borrowers. In other words, it is a percentage that represents the actual yearly cost of funds for the term of a loan. An APR provides a borrower with a number for comparison among lenders.
Another important point of comparison when searching for a home equity loan lender is fees. Home equity loan closing costs can range from 2 to 5 percent of your loan amount. Fees may be charged for appraisal, credit report, document preparation, attorney, loan origination, notary, and title search, among others. Some lenders may waive fees, but there might be certain conditions to be met. Fees should be disclosed upfront, so be sure to ask for a list so you know what to expect.
Although you may think that the lowest APR is the best home equity loan deal, that’s not always the case. Paying a high amount in closing costs could outweigh a slight difference in interest rate. Search for a lender with low fees and low interest rates. Closing costs and interest rates vary between lenders, so it’s always wise to comparison shop. Your local credit union is a great place to start.
How to get the best rate when comparing home equity loans
Lenders have certain borrowing standards for home equity loans and other loan products. The higher your credit score, the better your chance of securing the best rate on a loan. According to Experian, credit scores between 800-850 are considered exceptional, 740-799 very good, 670-739 good, 580-669 fair, and under 578 poor. In many cases, lenders will set a minimum credit score of 620 to qualify for a home equity loan and in some cases higher.
Factors that affect your credit score
- Payment history 35%
- The amount owed 30%
- Length of credit history 15%
- Credit mix 10%
- New credit 10%
You can improve your credit score by making all of your debt payments on time and keeping your credit card balances low. Only apply for new credit cards when needed because credit history is also a factor.
In addition to a good credit score, you will need to have adequate equity built in the home, as well as a low debt to income ratio and sufficient income.
Applying for a home equity loan
A home equity loan can enable you to borrow funds for any need at a low interest rate with fixed repayment terms. Begin the process by calculating the equity in the home. Based on what’s available, how much do you need to borrow? Many lenders will let you borrow about 80-85% of the available equity. Some lenders, such as Guthrie Community Credit Union as we previously mentioned, may allow you to borrow more depending on creditworthiness.
Information needed when applying for a home equity loan includes:
- Employment and residence information.
- Social security number.
- Property information.
- Mortgage information.
- Homeowner’s insurance information.
- Property tax information.
- Co-applicant information.
If you’re ready to apply, you can apply easily right online or go to a local Guthrie Community Credit Union office. In many instances, you can apply easily right online or go to a local Guthrie Community Credit Union office. Tap to learn more.