Home Loans How Home Equity Loans Work?

How Home Equity Loans Work?


People can use home equity loans to finance the high costs they face in their lives. However, they must ensure that this is the best way to cover their expenses before financing it with home equity loans. Because there are many types of loans and they all have their own criteria, and each one has different earnings. For this reason, you need to know how home equity loans work.

What are home equity loans?

Home equity loans are also called second mortgage loans, and that is what it really means. With these loans you can borrow as much as the value of your home. Usually people decide to borrow such a loan when they have a high amount of debt. For example; home equity loans are not preferred in cases such as payment of medical debts, assistance in paying a child’s tuition, or financing home improvements. For this reason, you should really have a good reason to get home equity loans.

Another reason for preferring home equity loans is that they have lower interest rates than credit cards or personal loans. However, having a low interest rate means greater risk, and you should remember that. The reason why lenders give low interest rates for home equity loans is that your home guarantee to credit payment. If you are unable to pay home equity loans, lenders can cover your debt with your home.

How do home equity loans work?

Home equity loans are loans that must be repaid over a fixed period of time and have a fixed interest rate. The conditions for repayment of home equity loans vary according to 4 main factors. These; monthly cash flow, your income, your credit score and the value of your home.

According to limitation that came in the wake of Subprime Mortgage Meltdown of 2008, most home equity lenders will cap the amount that they loan out at 80 or 85% of your home’s current value, minus the amount of your first mortgage.

The repayment maturity of home equity loans ranges from 10 to 30 years. It is not necessary to have an outstanding balance on the first mortgage in order to obtain home equity loans. You begin immediately repayment of home equity loans and pay interest on the entire loan amount. You will continue to pay home equity loans in the same way unless you fully repay them.

In addition, home equity loans have wage limits, such as first mortgages, document preparation fees and recording fees, origination fees of 1-2 points of the loan balance, application fees of $100 or more, attorneys’ fees, appraisal fees that can range anywhere from $150 to $300. And these limits of home equity loans are the same as the first mortgages.

With all these factors in mind, if you still want to get home equity loans, you should get help from different sources to decide what the best offer and best price will be for you. These sources may include credit unions, banks, private lenders, investors and mortgage brokers.

Once you have received home equity credits, you can apply for direct debit payments for monthly payments. And you can also take out a home equity loan in lieu of a cash-out refinance.

How can you qualify for home equity loans?

In order to qualify for home equity loans, you will have to undergo the same commitment as other types of loans. Lenders want to review your credit score and credit reports, so you have a hard credit inquiry. The reasons why lenders look at your credit reports are as follows;

  • The loan-to-value ratio of the loan,
  • Your income and expenses,
  • your primary mortgage balance,
  • Home value,
  • The total amount of debt that you’re carrying,
  • Credit history.

Your credit score along with these factors will determine the terms of your loan, such as the interest rate and time until repayment is made in full. For home equity loans, you will have to pay the same insurance fees for your first mortgage, such as cancellation, funding, evaluation and paperwork fees and attorneys’ fees.

You will need to have some documentation with you to get home equity loans from lenders. These documents are as follows;

  • Your most recent pay stub with your year-to-date income listed,
  • Two years of W-2s or tax returns, if you’re self-employed,
  • Debt records for any credit cards or other loans,
  • Statements for all your bank accounts and assets.

In addition to these documents, the lenders will also assess how much you have the right to receive home equity loans. Because the more you are entitled to a home, the higher the amount of home equity loans you can get. Even if you own the whole house, you can get home equity loans up to 85% of the value of the house.

The difference between home equity loans and home equity lines of credit

Both types of loans are similar in that they allow you to borrow money against the value of your home, but both types are different in terms of work.

Home equity loans work like mortgage loans, but home equity lines of credit work like credit cards. Home equity lines of credit also have adjustable interest rates however, home equity loans have a fixed interest rate.

If you’re not sure which of the two options is best for you, you can get in touch with a financial advisor or your current credit officer and choose the option that’s best for you.

Example of calculation for home equity loans

For example; You have a house worth $ 200,000 and you are allowed to borrow up to 85%. However, your mortgage loan will still be $ 100,000. (The value of the house corresponding to the right you have on the house).

Since the value of the house is $ 200,000, 85% of this is taken as a priority. This equals $ 170,000. However, since your mortgage loan is $ 100,000, you will be approved for a loan worth the remaining amount when you subtract 100,000 from 170,000. That’s $ 70,000.

The equation you will use to calculate the amount of home equity loans;

The amount your home is worth x the percentage of home equity you’re allowed to borrow – how much you owe on your home.


Please enter your comment!
Please enter your name here