Home equity loans can be very helpful in reaching for your financial goals. Home equity loans are otherwise known as taking out a second mortgage on your home. Home equity loans allow you to borrow money depending on the difference in the amount of your first mortgage you have left to pay off and your home’s current market price point. In a home equity loan, your home is the lender’s collateral. If you take out a home equity loan, you will pay a fixed amount of both repayment and interest over an agreed upon amount of time.
If you take out a home equity loan, you can make home improvements which will add value to your home’s market price point. Taking out a home equity loan can be a great option if you are looking to expand your financial portfolio or engage in business ventures.
The Difference Between a Home Loan and a Home Equity Loan
A home loan, also known as a mortgage, and a home equity loan, also known as a second mortgage are similar in that they are both ways to borrow money with your home serving as collateral in the case you are not able to make your payments on time. But there are differences that make these two types of loans stand uniquely from the other.
Home loans allow you to purchase a home with as low as only 20% of the total cost of the home purchase coming out of pocket. The interest rates and timeframes will vary on a home loan or mortgage. With a home equity loan, you are taking out a loan based on the amount of your mortgage you have already paid off, meaning the amount of your home you already independently own as equity.
With a mortgage, you can either take on a 15 year or 30 year long repayment period, in which you will pay back your mortgage loan with interest in a series of installments. If you fail to make payments the lender can seize your home as collateral. With a home equity loan, you are taking out a loan on the part of your home you already own, and the interest rates on the loan, while fixed, tend to be much higher than interest rates when you take on a mortgage, which can be fixed or variable.
Why Get a Home Equity Loan?
There are many different reasons you may decide to get a home equity loan. Perhaps when you bought your home and took out your first mortgage, you were working as an employee at a business, but as time went on you made payments to your mortgage, you had an idea for your own self-run business. Taking out a home equity loan would give you the financial means to invest in your small business, which in the long run could end up helping you make more money than your old job.
Another good reason to take out a home equity loan would be to invest in home improvements. Having the money to invest in home improvements can increase the market value of your home, allowing you more financial mobility in the future if you decide to sell your home and move somewhere new. Another valid reason to take out a home equity loan is to consolidate any debt you may owe. You can use your home equity loan to pay off high interest credit card or auto debt and consolidate your payments into a lower cost fixed interest rate with your home equity loan.
In some cases, taking out a home equity loan can be helpful in cases of medical emergencies or sending your child to college. Home equity loans may have lower interest rates than student loans or medical bills, and in the long run, you can save money on interest rates and repayment by utilizing your home equity to cover these costs outright. It is important to look over the numbers involved when deciding whether to take out a home equity loan to cover costs such as college tuition or emergency bills to make sure that it is smarter for your personal situation to take out a home equity loan.
Banks that Offer Home Equity Loans
If you are considering taking out a home equity loan, it is important to know which establishments you can count on to lend you the loan. Here are some options if you are considering a home equity loan today.
- PNC Bank PNC Bank offers home equity loans to homeowners with a credit score as low as 620. Their maximum loan-to-value percentage is 84.9%. They also offer the rare option of a variable rate and payment, or a fixed rate and payment schedule.
- US Bank US Bank offers home equity loans to homeowners with a credit score as low as 620 as well. Their maximum loan-to-value percentage is 80%. US Bank offers a 10-year loan repayment period with a 4.75% fixed interest rate or a 15-year loan repayment period with a 4.90% APR.
- Golden 1 Credit Union Golden 1 Credit Union offers home equity loans with a no minimum credit score. For a limited time, they are offering a minimal interest rate of only 1.99% for the first six months.
- Navy Federal Navy Federal Credit Union offers home equity loans with no application. Their interest rates start at a fixed rate of 4.99%, and their minimum and maximum loan amounts vary from 10,000 to $500,000.
How to Know if You are Eligible for a Home Equity Loan
Because you are taking out a loan on the part of your home which you already own, or your home’s equity, to qualify for a home equity loan you most often will have already had to pay off 20% - 15% of your home’s original mortgage. You must own a good portion of your home yourself before you are able to utilize your home as equity. Additionally, with some banks you must apply and pass a credit assessment where the lowest credit score you can have to qualify for the loan is 620.