Home Equity Loans FAQs
Learn About the Option of Borrowing Against Equity in Your Home
You may have the option to borrow against some of the available equity in your home if your current mortgage balance is less than the value of your home. Two popular options for doing this are taking out a home equity loan or a home equity line of credit. MidCountry Bank offers both of these financing solutions.
What is a home equity loan?
A home equity loan is secured by your home and enables you to access some of your available equity in the form of a single payout. Unlike a home equity line of credit (HELOC), your home equity loan proceeds are paid out as a one-time lump sum, and you can't borrow funds on the loan again, even if you repay them.
Understanding the basics
Here are some basic things to know about home equity loans:
The rate. A home equity loan will typically have a rate that is fixed for a period of 5 or 10 years with established monthly payments. This payment stability can make it easier to budget around this type of loan. As an added bonus, the interest paid on a home equity loan is usually tax deductible, so you could potentially save on the interest you pay. Everyone's situation is different, so you should talk to your tax advisor regarding interest deductibility for your personal situation.
Qualifying. In order to qualify for a home equity loan, you must have available equity in your home. In other words, the amount you owe on your home must be less than the value of your home. Most lenders will allow you to borrow up to 80% of the value of your home minus the amount you owe. Your lender will also typically look at your credit score and history, employment records, monthly income, and monthly debts, just like they did when you first got your mortgage.
Maximum loan amount. Your lender will calculate the maximum loan amount you can borrow. Here is an example of the calculation. Note you do not need to borrow the maximum amount to qualify.
Assuming the lender allows a maximum loan amount of up to 80% of your home's value and your home appraises for $300,000, if you owe $150,000 on your current mortgage you may qualify for a loan amount of up to $90,000.
Is a home equity loan right for you?
A home equity loan could be a good option if you have an immediate expense and want to receive all of your funds up-front and/or you prefer to always pay your loan in set monthly payments over a period of time. For some borrowers, payment stability over the life of the loan can make it easier to set and manage a budget.
So before you get a home equity loan, consider things like how much you think you'll need to borrow over what period of time, and whether you'll be able to make the payments in full and on time in order to maintain your credit rating and keep your homeownership secure. Since your house is used as collateral for your home equity loan, it's important not to fall behind in your payments and put your home at risk of foreclosure.
When borrowing from a home equity loan, mortgage, credit card or any other credit product, it's important to borrow only the amount that you can comfortably afford.
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