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After home equity loans became nearly non-existent due to the market conditions, they are slowly making their way back. Here are 4 quick things to know about these loans:
- Equity is a must: You must have at least 20% equity in your home before you can qualify for a home equity loan. Equity is the portion of your home that you actually own. For example, if you purchased your home for $200,000, the balance on your loan must be $160,000 or less.
- Two types of loans: A standard home equity loan is when you borrow a single large sum of money. The second type is a home-equity line of credit, also called HELOC. With a home-equity line of credit, you can borrow smaller amounts of money over time, up to a fixed amount. When deciding between the two loans, consider whether you are doing an large project all at once which you need money for, or if you are going to be doing smaller scale projects over a period of time.
- Not a good option for small loans: When taking out a home equity loan, they are usually not available for loans less than $10,000. Some banks don’t utilize home equity loans for less than $25,000.
- A home equity loan is a mortgage: Due to the fact that a home equity loan is a type of mortgage similar to the one you took out to purchase your home, there are certain pluses and minuses to taking one out. The interest paid on a home equity loan is tax deductible and the interest rates tend to be lower than those for a credit card or other types of loans you could use. With all of the benefits to home equity loans, it’s important to remember that these loans are directly connected to your home so if you do fall behind on payments, your home can be foreclosed on.
A home equity loan may be the best choice for you, however, make sure you fully weigh the benefits and drawbacks before taking one out.