A home equity loan or home equity line of credit allows you to borrow money against the equity in your home. Equity is the difference between your home’s appraised value and how much you still owe on your original mortgage balance. Home equity loan programs distribute the money in one lump sum whereas a HELOC allows you to access the money as you need it. The downside of either is you risk losing your home if you don’t make the payments.
Find out how much you can borrow using your home as collateral for a home equity loan or home equity line of credit. Based on your income, credit rating and total amount of debt, you may be able to borrow up to 80 percent of the current market value of your home. The lender will subtract the remaining mortgage principal and any outstanding liens from your home’s market value when determining how much you can borrow.
Prepare your home for appraisal. Some lenders require a full appraisal when you apply for a home equity loan; others go by the most recent tax assessment to determine a home’s value. Write out a list of all the improvements you’ve made to the property since you bought it to give to the lender or appraiser. Many types of improvements increase a home’s value.
Compare the loan rates of several lenders. The amount of interest you pay generally depends on the amount of money you borrow. Loan terms and settlement costs also vary among lenders. Talk to your current lender, although you may be able to get a better deal from another bank or financial institution.
Find out the total cost of a home equity loan or line of credit. Home equity loans usually come with upfront out-of-pocket costs, points, closing costs or annual fees. Ask if a lender will negotiate loan expenses. In some cases, lenders do away with certain fees to cut the cost of the loan and get your business.
Shop for a loan that offers a fixed interest rate. Generally, a home equity line of credit has a variable interest rate. Your monthly loan payments may be lower at first but they can increase later on. A fixed interest rate on a home equity loan means you pay the same monthly payment over the lifetime of the loan.
Read the loan documents carefully before signing. Ask questions if you aren’t clear about any of the loan terms or conditions. If you go with an adjustable interest rate, the loan agreement should indicate the cap, or limit on how much the interest rate can increase.
Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.