A blog from Pacific Mortgage Co

Why get a home equity loan?

Why get a home equity loan?

Homeowners can tap into the equity in their existing home as a way to borrow cash to pay off other high-interest loans, pay for home improvements, have cash on hand for medical or education expenses, or afford other large purchases. However, not all homeowners will qualify for a home equity line of credit, or HELOC.

Homeowners who have built significant equity from making large down payments, paying down their mortgages, or increased market values are more likely to qualify for home equity loans. While the requirements vary by financial institution, most lenders want homeowners with strong credit scores, steady income, few debts, and a history of reliable payments.

What is a home equity loan?

A home equity loan is a second mortgage against a home, the proceeds of which are given to the homeowners in one lump sum. The loan is secured against the value of the home; once received, homeowners begin repaying it immediately in monthly installments at a fixed interest rate like their original mortgage.

Home equity loans are similar to personal loans in that they can be used for almost any purpose and have fixed APRs. However, home equity loans often have significantly lower interest rates as the home is being used as collateral.

Why get a home equity loan?

Homeowners can tap into the equity in their homes in three ways: a home equity loan, a home equity line of credit, or a cash out refinance. These loans are helpful when homeowners need a large sum of money to finance large expenses; popular uses for home equity loans include paying off credit card or other consumer debt, financing major home improvement projects, paying college or school tuition, or using the money for a large purchase such as a vehicle or boat. Homeowners who use their home equity loan for substantial home improvements may be able to deduct the interest on the loan from their taxes.

The top 5 requirements for a home equity loan

  • While specific requirements vary from lender to lender, most homeowners must meet these five basic requirements:
  • Have at least 15 to 20 percent equity in a home. The equity in a home helps lenders determine how much homeowners can borrow.
  • Have a credit score of 650 or higher. Higher credit scores can help homeowners qualify for lower interest rates.
  • Have a debt-to-income ratio lower than 43%. Lenders view borrowers with a low debt-to-income ratio as low risk.
  • Have sufficient, steady income. Lenders will evaluate a borrower’s income to ensure they will be able to continue to afford the monthly payments.
  • Have a reliable payment history. A timely pattern of paying bills with few or no missed payments show lenders that a borrower is low risk.

by Author, August. 18, 2020

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