Find out if Home Equity Loan is the right loan for you

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Home Equity Loan

Home Equity Loan

Home Equity Loan

A home equity loan is a fixed loan amount, secured by residential property, and is used to access the existing equity in the property.

The loan amount (less any fees) is paid out to the approved borrower at time of closing, and interest charges begin accruing on the full loan amount. It typically is provided as a 2nd mortgage as it is obtained in addition to an existing mortgage when the borrower does not want to refinance or payoff an existing mortgage.

Home Equity Loans are less common today as HELOC’s have become more popular. The amount of the Home Equity Loan is based upon the borrower’s qualifications, and the amount of existing equity (i.e. current home value less existing mortgage balance). Most Home Equity Loans allow the borrower to obtain a loan amount up to 80% of the property’s value less any outstanding mortgage balance. For example, a qualified borrower with a qualifying property appraised at $400,000 with an existing mortgage of $270,000 may obtain a Home Equity Loan of $50,000 ($400,000 x 80% - $270,000 = $50,000). Some creditors may allow qualified borrowers to obtain up to 90% of the homes appraised value.

The term, or length, the loan can be between 10 years and 30 years with the most common being 10 year and 15 year terms. Typically, the interest rate is a fixed rate over the life of the loan, but variable rate loans are also available from some creditors. The interest rates being charged on home equity loans are usually a little higher than conventional 1st mortgages, but less than unsecured loans.

On a “fixed rate” Home Equity Loan the loan amount will be amortized over the length of the loan to establish a fixed monthly principal and interest payment so the loan will be completely paid off at the end of the term. For example, on loan of $50,000 with a 15-year term at an interest rate of 6% the required monthly principal and interest payment will be $421.93. With “variable rate” Home Equity Loans the interest rate is tied to short-term interests, such as the Prime Rate, plus a fixed margin of 1% or 2%, so that the rate being charged will change as interest rates change. This means the required monthly principal and interest payment will change each month as interest rates change and the loan is re-amortized each month over the remaining term of the loan so this home equity loan is fully paid off at the end of the term.

Home Renovation projects can be financed and provide a great return on your investment. Not only you could be adding equity to your home but you will have many options to remodel your home. Whether it is home equity loan, fha 203k loan, cash outs or personal loans. Check the appropriate home remodel loans for your situation and let Kukun match you with the right loan and right lender.

Pros

  • Loan proceeds paid out in lumpsum.
  • Fixed interest rate and payments.
  • Monthly principal and interest payments fully payoff loan by end of term - no balloon payment.
  • Loan terms up to 30 years, and may be paid off early without fees or penalties.
  • Low upfront/closing costs and fees.
  • Rates lower than other forms of credit.
  • Interest maybe tax deductible (seek advice of tax professional).
  • Allows borrower to keep existing 1st mortgage.

Cons

  • Requires property to have reasonable amount of equity – existing loans plus Home Equity Loan typically limited to 80% of existing value of property.
  • Borrower needs good credit and ability to repay loan to qualify.
  • Requires full principal and interest payments monthly.
  • Fixed interest rate maybe higher than conventional 1st mortgage rates.
  • Requires full home equity loan application, borrower documentation and appraisal, and may take 30-45 days to obtain funds.