# Understanding Home Equity Loans

## What is a Home Equity Loan?

This kind of loan can provide you with cash in the form of a lump sum payment that you will give at a fixed interest rate, but only if you have enough equity.

Equity is the distinction between the value of your house and what you still owe on the mortgage. Consistently paying off your mortgage is one way to increase the equity in your home. And if real estate values increase in your area, your equity can grow even faster.

## How Does a Home Equity Loan Work?

A home equity loan simultaneously provides you access to a lump sum of money. It may be the right choice if you know how much money you’ll require and when you’ll need it (to finance a remodeling project on a budget, for example).

You will repay this loan (principal and monthly interest) at a fixed rate for several years. Confirm you can afford this second mortgage payment, including your current mortgage and other monthly expenses.

## How Much Can You Borrow With This Type of Loan?

A home equity loan generally permits you to borrow between 80% and 85% of the worth of your home, lowering what you owe on the mortgage. You can do some easy math to estimate how much you could borrow.

## How to Calculate the Loan

To illustrate, let’s say your home is worth \$350,000, your mortgage balance is \$200,000, and your lender will permit you to borrow up to 85% of your home’s value. Multiply the value of your house (\$350,000) by the percentage you can borrow (85% or .85). That gives you the highest value of \$297,500 that you could borrow. Subtract the remaining amount on your mortgage (\$200,000), and you’ll get the approximate quantity you can borrow as a house equity loan; in this case, \$97,500.00.

### Requirements

Qualification requirements for these loans vary by lender, but typically, these are some of the general requirements you will need to get approved:

• Accumulated home value of at least 15% to 20%.
• A credit score of 620 or higher.
• A debt-to-income ratio of 43% or less.

To confirm the fair market value of your house, your lender may also require an appraisal to determine how much you can borrow.

## Are our Home Equity Loans a Good Idea?

Whether or not a house equity loan is a good idea depends on your financial condition and your strategy with the money. Using your house as collateral carries substantial risk, so it’s worth the time to weigh the advantages and disadvantages of a house equity loan.

### Pros:

Fixed fees provide predictable payments, making budgeting easy.

You can acquire a lower interest rate than a personal loan or a credit card.

If your current mortgage rate is lower, you don’t have to give it up.

The interest may be deductible if you use the loan for home development or renovations.

### Cons:

Less flexibility than a house equity line of credit

You’ll pay interest on the total amount of the loan, even if you’re using it incrementally, such as for an ongoing remodeling project.

For any loan secured by your home, late payments can jeopardize your home.

If you are ready to sell your home before you’ve finished paying off the loan, you’ll need to pay off your house equity loan balance.

## What are the Differences Between a Home Equity Loan and a HELOC?

Unlike a lump sum home equity loan, a house equity line of credit, or HELOC, gives flexibility. There is still a total loan quantity, but you only borrow what you need, then pay it off and borrow again. That also means you pay a HELOC incrementally based on the amount you use instead of the total loan amount, like a credit card.

The other main difference is that HELOCs have flexible rates. Your rate could go up or down over the life of the loan, making your payments less expected. HELOC rates are often discounted at the start of the loan. However, after an initial phase of about six to 12 months, the interest rate usually goes up.

Likewise, if you have any questions, contact a Mister Loans specialist today who will gladly do the necessary paperwork for your loan after perfectly clarifying the scenario for you.

About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.