So you have a successful home mortgage loan, but down the line you need money for making home improvements or for other major purchases or expenses. A loan secured by the equity you have in your home can provide the means for acquiring those much-needed funds.
What is a home equity loan?
The more equity you have in your home, the more borrowing potential you have. If you've been paying down the principal balance on your mortgage or if your home has appreciated in value, you may be able to access a portion of that accumulated equity. A home equity loan offers you a one-time lump sum payout. In some cases, a home equity loan is a type of second mortgage.
How is your home equity quantified?
Your lender will consider your Loan-to-Value ratio (LTV) in determining whether or not to approve your application. The basic formula:
Current Loan Balance / Current Appraised Value = Ratio (Percentage)
In Texas, the maximum LTV is 80%. This includes your current mortgage. For example, your house appraises for $250,000 so you can borrow up to $200,000 (80% of $250,000), however you currently owe $120,000. The maximum home equity loan would be $80,000 ($200,000 - $120,000 = $80,000).
What are the basic features of home equity loans?
Rate: Home equity loans offer a fixed or adjustable interest rate. Bonus: The interest paid on a home equity loan is usually tax deductible, a potential savings. Just check with your tax advisor to confirm.
Qualifying: Most lenders allow you to borrow up to 80% of the value of your home minus the amount you owe. Your lender will consider all of the same factors they did when you first obtained your home mortgage: credit score and history, employment history, monthly income, and monthly debts.
Variables: Some features will vary among lenders, requiring careful comparison. Potential differences:
- Minimum loan amount - The minimum amount you are required to borrow by the lender
- Up-front fees - Charges to set up your home equity loan, like application and/or appraisal fees
- Automatic payment discount - Some lenders offer a discounted interest rate if you set up automatic payments from an account also held by that lender.
Is a home equity loan right for you?
If you have an immediate expense and want to receive funds up-front, a home equity loan could be a great choice for you. Plus, if the interest on your loan will be tax deductible, that offers savings. Consider the amount you need over what time period. It's always prudent to look at all your options, like refinancing to set you up with a new mortgage. Generally, though, the closing costs associated with a home equity loan are less than they are for a refinance. Just one of the factors your Community National mortgage officer will help you weigh in this decision.
Your house is the collateral for your home equity loan, so it's important not to do anything that would put your home at risk. Borrow only what you can comfortably afford. And of course, maintain your good credit rating and history as an investment in your future.
Need some feedback as you consider what's best for you? Your Community National Bank & Trust mortgage professional awaits! Texas banking regulators do have some special rules that apply to Home Equity loans and we'd like our customers to be solidly "in the know." We'll be watchful at every step. Here is a handy online application to get things started.