If you want to learn more about what a home equity loan is, and whether it’s a good idea to use one for temporary needs, then keep reading! We’ll also discuss how a mortgage broker can help you find the best lender for your situation.
Successfully owning a home and taking care of everyday needs is a fine line to tread and even an accomplishment for most of us. Everything we do in life comes in a sequence of steps, allowing us to move through our list with relative ease. For example, having your first mortgage. That, in itself, is an accomplishment that many still hope to achieve.
A traditional mortgage implies that you sign up for predictable monthly payments. As you buckle up for this for the long haul, you have to be sure you can afford the payments for the duration of the loan. As you’re diligently paying off your mortgage, life sometimes meddles in.
Your home suddenly needs an urgent repair. Or you’ve decided to sign up for an overdue home renovation. Or your youngest finally grew up and needs your financial support to further their education. Needless to say, all this is happening while you’re still paying off your home mortgage, and cash is nowhere near enough. So what can you do about it?
In this case, your ideal go-to solution is getting a home equity loan. You may have heard about it before, or maybe you are still wondering what is a home equity loan anyway? Is a home equity loan a good idea when dealing with temporary needs?
These are only some of the questions typically found within the home equity loan FAQs, and we’ll do our best to shed some light on them.
What Is a Home Equity Loan?
Although it may sound complex, a home equity loan is pretty straightforward to explain. Basically, a home equity loan is a fixed-term loan offered by a lender to a borrower based on the equity of their home.
In other words, the amount you would get in such a loan is based on the difference between a home’s current market value and the mortgage balance due.
What you need to know is that a home equity loan enables you to address any financial emergencies you may face — for which you don’t have the money you need available.
Is a home equity loan a good idea? For many homeowners, a home equity loan comes as a much-needed relief since it means they’re not forced to sell their homes while also helping them consolidate debts. Some people will also use this kind of loan to pay off credit card debt, buy a car, organize a wedding, or even take a vacation.
How Is a Home Equity Loan Different From a Personal Loan?
When you need extra funding for your projects or emergencies, it’s easy to make fast decisions without analyzing the matter thoroughly. For instance, knowing what a home equity loan is and how it is different from a personal loan is essential if you want to get the best interest rate available.
For once, a home equity loan has lower rates and longer repayment terms than a personal loan, which is an attractive perk to many. However, you need to have enough equity available to get one in the first place. Plus, you also need to be willing to use your home as collateral for the loan.
What does it mean to have enough equity? It means you must have paid down enough of your first mortgage to qualify for the home equity loan.
Personal loans, on the other hand, come with higher interest rates, and are usually amortized over a short period of time which puts a large payment on the consumer. Simply put, you end up unnecessarily paying off huge amounts of money that you would have otherwise invested in your home or your family’s well-being.
That’s why knowing what a home equity loan is, pays off in the end. This leads us to another question we hear often;
How Does a Home Equity Loan Work?
The borrower receives from the lender, via the home equity loan, a lump sum upfront. In return, they must make fixed monthly payments over the life course of their loan.
Homeowners can also opt instead for a home equity line of credit (HELOC). A line of credit HELOC is a revolving credit line that allows for a maximum amount of up to a certain percent of a home’s value. While you may have to pay an upfront closing cost, a HELOC can be a great way to get a secured loan when you don’t quite have enough equity to get a fixed-rate conventional loan.
A HELOC is often a good way to access money for renovations or other large purchases, such as a new appliance. The interest rate on a line of credit HELOC is usually lower than a fixed-rate loan.
Is a home equity loan a good idea for you?
The main aspect a borrower needs to be mindful of is that, both in the case of home equity loans and HELOCs, their house is subject to foreclosure if they fall behind on their payments.
In the case of an equity loan, the house is at risk as soon as the money is drawn, as there’s no way to get the cash back. With a HELOC, foreclosure is a risk if the funds are drawn and the balance falls below a certain threshold. It’s recommended that borrowers speak with a mortgage broker before taking out any home equity loans or HELOCs and also to be aware of their payment dates.
Working with a mortgage broker will also let you access different types of lenders. For instance, if you don’t qualify for a home equity loan with a bank or credit union, you can get one from private lenders. These lenders don’t have the same stringent requirements as traditional lenders and can lend to anyone with a decent credit score. You may also be able to get a lower interest rate than what you have now.
Thus, working with a mortgage broker can help you find the best lender for your situation.
If you’ve paid down a significant part of your home mortgage and would like to benefit from a home equity loan to address pressing financial needs, reach out to us.
Putting off your plans for later, when you may or may not have the funds you require, might be something you regret down the line. This is why we are committed to offering financial solutions to address your needs for you to achieve your goals. Now, not later!
Hopefully we’ve addressed your most pressing questions about what a home equity loan is and how it can benefit your temporary needs. You might also be interested in: