What is a Home Equity Loan and Frequently Asked Questions

09.15.2020 | Category: Homebuying

Updated 6.6.2024

As a homeowner, unexpected costs can arise at any point and put stain on household finances. One step you can take to lessen the load off your personal finances is a home equity loan, also referred to as a second mortgage. Home equity loans are secured by the value of your property, offering lower interest rates and higher loan limits to borrowers. Home equity loans allow you to access the equity you’ve built within your property to pay for unexpected expenses, renovations, etc. By borrowing against your home’s equity, you can then get assess to cash and pay off those unexpected costs.

Although similar to a home equity line of credit (HELOC), a home equity loan is traditionally based on a fixed amount, for a fixed time, with a fixed rate of interest, making payments more predictable. By contrast a HELOC has payments and interest rates that will vary based on the amount that is borrowed.

Finding your perfect loan type for your specific situation can be difficult, below are the important benefits and qualifications to help you decide if a home equity loan may be right for you!

Benefits of the Home Equity Loan

There are many benefits to homeowners who are considering applying for a home equity loan. These benefits include:

Easier qualifications

One of the biggest benefits that a home equity loan has to offer is the easier-to-meet qualifications provided by this loan program. Because a home equity loan uses your home as collateral, you can apply with a credit score as low as a 620.

Lower interest rates

Another great benefit to the home equity loan is they often offer a more affordable interest rate when compared to revolving credit or personal loans. The cash you can get from a home equity loan can be used to help pay off high-interest debts and loans. Many homeowners opt to use a home equity loan to consolidate debt or pay for large expenses, while enjoying the stability of a loan with a fixed term and lower interest rate.

Predictable Payments

Unlike revolving credit cards, with a home equity loan, you can know what to expect. With predictable monthly mortgage payments and steady term lengths and requirements, a home equity loan is a great option to ensure no dramatic increase in fees for a more dependable loan option.

Tax Incentives

If a homeowner intends to use the funds from their home equity loan towards home improvements, they may be able to deduct the mortgage interest of the loan on their taxes. To qualify for these benefits under the 2017 Tax Cuts and Jobs Act, a homeowner must use the funds from a home equity loan for capital improvements, such as to “buy, build, or substantially improve” the home that secures the loan. This is not intended as tax advice, and you should consult a tax specialist for more information.

How to Qualify

If you have decided that a home equity loan is perfect for you, here are the qualifications that will be reviewed in your mortgage application:

• Home Equity: Most lenders will require 80% home equity or higher.
• Income: It is important you have both stable and verifiable income to ensure you can pay off a loan’s balance.
• Debt-to-Income Ratio: One of the key factors in any loan application process is the debt-to-income ratio (DTI). Most lenders will require a DTI of no higher than 43% of their monthly income.
• Credit Score: Although the minimum credit score is lower for a home equity loan, having a higher credit score will increase your chances of being approved by a lender.
• Appraisal: Depending on the lender, most homeowners applying for a home equity loan over $250,000 may need to get a second appraisal on their home.

Once the requested documents have been submitted to your lender, they will review your file based on loan underwriting guidelines. The total process for a home equity loan can vary, average approval is30 to 45 days, depending on factors such as verification of appraisals and government requirements.

Commonly Asked Questions

When Should I Consider a Home Equity Loan

The home equity loan is a great option for a homeowner who wants to borrow a lump sum against their home’s equity. When interest rates are higher, it is a great alternative to a cash-out refinance. Additionally, qualifications for a home equity loan are typically easier to meet than those of other loan programs. If you are looking to pay off debts, make home improvements, or pay for other unforeseen expenses, a home equity loan may be a great option for you.

What Can I Use a Home Equity Loan For

The most common uses of funds from a home equity loan include, home improvements, debt consolidation, college costs, emergency expenses, wedding costs, and long-term investments. Although there are no guidelines on what the cash from a home equity loan can be used for, most lenders will discourage using funds for personal expenses or extravagant spending, such as vacations or luxury vehicles.

How Can I Know My Home Equity

To figure out how much home equity you have, you take your current appraised home value and subtract it from the amount you still owe on your current mortgage. You can improve your home’s equity through renovations and upgrades, paying off your mortgage balance, and market value increases.

If you’d like to access a home equity report, feel free to use our free home valuation calculator to see a current estimated value of your property.

Discover More About a Home Equity Loan Today!

A home equity loan is a great way to address unexpected costs that may be weighing on you financially. If you have decided that a home equity loan meets your needs as a homeowner, now is a great time to apply!

Get pre-approved or start your home equity loan application today.

If you have any questions about how a home equity loan can help, Mutual of Omaha Mortgage is happy to offer a free consultation from one of our many mortgage experts. Give us a call any time at 1-800-24-RATES (2837).

Borrower must occupy home as primary residence and remain current on property taxes, homeowners’ insurance, the costs of home maintenance, and any HOA fees.