Most homeowners have at least some equity that they could put to use. Equity has the power to either improve the quality of your life or earn you money. And sometimes, it can even do both.
But most people let their home equity just sit there doing nothing. Wouldn’t it be great to tap into it and finally make that home remodel, or to get your first real estate investment?
If you’re wondering how to tap into your equity using a home equity loan, and what home equity loan rates you can expect when borrowing from yourself, then keep reading for answers to all of your questions.
What Is a Home Equity Loan?
Home equity loans are just one of the available loans for rental properties and home remodeling projects. They allow you to put the equity in your current home to work for you.
The equity is the difference between your home’s current value and the amount you owe on your mortgage. Lenders that offer home equity loans typically lend up to 80% of your current equity.
So if your home was currently valued at $300,000, and your current mortgage was $100,000, then you’d have $200,000 in equity. A lender would be willing to provide a home equity loan for up to $160,000, as they want you to keep at least 20% equity in your home at all times.
In essence, you are borrowing from yourself. Using a home equity loan is typically a much better idea than refinancing and pulling cash out.
Plus, there are multiple types of home equity loans to consider; a traditional home equity loan and a HELOC, or home equity line of credit.
Home Equity Loan
Home equity loans act like personal loans. You receive a lump-sum payment upon approval of your loan and begin making repayments right away. You borrow the entire amount at one time, whether or not you choose to spend it all at once.
Home Equity Line of Credit
A home equity line of credit is more like a credit card than a personal loan. With a HELOC, you only borrow what you need to at any given moment.
Once you draw against your line of credit, you begin making payments on just that amount. You are free to pay it back, and continue using your line of credit until your draw period is over, which is typically about 10 years.
Any balance left at the end of your draw period will require regular monthly payments until paid off.
HELOCs work better for those who are going to have long, drawn-out remodeling projects. For example, if you plan to perform a remodel over the course of one or two years, paying for each individual project as you go, a HELOC may work better.
Though, if you are hiring a general contractor to handle a large project, you’re going to need all of the money for the entire project at one time. Thus, a normal home equity loan would work better.
Common Uses for Home Equity Loans
Home equity loans can be used for nearly anything you can imagine. As long as you have enough equity in your home, they are relatively easy to get, as the loan is secured against the equity.
This means the lender doesn’t have as much to lose if you fail to pay your loan back. This makes them more eager to give these loans out, whether or not you have a valid reason to borrow the money n the first place.
However, most people who go through the trouble of getting a home equity loan use it in one of a few ways.
Some use it for home remodeling projects. Many large projects, such as remodeling a kitchen or bathroom, replacing windows or a roof, adding a pool, and so on, cost tens of thousands of dollars.
The benefit of using a home equity loan is that homeowners can enjoy the home upgrades now, while also increasing the value of their home. This is usually the best way to perform home upgrades if you don’t have the cash upfront.
The other common use for home equity is investing in real estate. By borrowing against your current equity, you could potentially purchase a rental property.
Then, you would have another home that is increasing in value over time, growing your net worth. And if you’re lucky, you’ll also be cash flowing each month, thanks to rent payments.
Home Equity Loan Rates
One of the biggest benefits of home equity loans is the approachable interest rates. Because the loan is secured by your home, interest rates are low compared to unsecured loans.
Interest rates on home equity loans range from 3% to 12%, depending on a number of factors. One of the most important factors is your credit score. Taking the time to improve your credit score before applying for a loan is a wise move.
Just know that using your home as collateral always presents a risk. Should you fail to make repayments on your loan, you could end up losing your home. Make sure you have the financial means necessary in order to make loan payments each month.
Want to find out how much you could borrow against your home equity, and what your interest rate might be? You can search for, and find, a home equity loan calculator online to get an estimate right away.
If you are interested in using this type of loan in the near future, you can apply from multiple different lenders online and see who gives you the best interest rate and the most favorable loan terms.
Home Equity Presents a Viable Borrowing Strategy
As you can see, home equity loan rates are attractive. They are one of the best borrowing strategies, particularly if you are using the loan to acquire a new investment or improve the value of your current home.
While borrowing from yourself in this way does present some risk, it’s often a low risk considering the low rates and flexible payment terms offered by lenders.
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