Buzz
If you own a home with significant equity, you may be eligible to access that equity through a home equity loan. This type of loan enables you to borrow funds by leveraging the value of your home as collateral. Here's an in-depth guide on how these loans operate.
What is the process behind a home equity loan?
1. Assess your home's equity
Home equity is determined by subtracting the remaining mortgage balance from the current market value of your property. For instance, if your home is valued at $300,000 and you owe $200,000, your home equity would amount to $100,000.
2. Submit a loan application
To proceed with obtaining a home equity loan, you'll need to submit an application to a bank, credit union, or online lender, similar to when you initially applied for your mortgage. The lender will evaluate your income, credit score, job status, and any existing debts to determine your eligibility and the maximum loan amount you can secure.
3. Decide on the loan amount
Most lenders will allow you to borrow as much as 85% of your home's equity. Using the earlier example of $100,000 in equity, you could qualify for a loan up to $85,000.
4. Receive the total amount in one lump sum.
In contrast to a home equity line of credit (HELOC), where funds are borrowed as needed, a home equity loan offers the entire amount upfront, delivered as a lump sum after the loan closing.
5. Repay in fixed monthly installments.
The loan is repaid over a set period, like 10 or 15 years, with a fixed interest rate and equal monthly payments, similar to a typical mortgage. Home equity loans are installment loans with a fixed payoff schedule.
6. Keep up with mortgage payments.
Your home equity loan is distinct from your primary mortgage. You will still be required to make your standard mortgage payments in addition to the payments for the new home equity loan.
Home equity loans provide access to some of your home's value for purposes like home improvements, debt consolidation, college tuition, or other significant costs. Keep in mind, however, that your home is collateral for the loan, so defaulting may result in foreclosure.
