What’s the best way to use a home equity loan?
Do you have a home improvement or renovation project that you have been keeping on the back burner because you were worried about being able to afford it?
A home equity loan, sometimes referred to as a second mortgage, allows you to borrow against a portion of the value of your home. Unlike a traditional bank mortgage that is used to buy a house, a home equity loan can be used towards other life expenses.
With interest rates at an all-time low, it is now an even better opportunity to maximize the value of a home equity loan.
How Does A Home Equity Loan Work?
With a home equity loan you are borrowing against the equity you’ve built in your property.
In the event of a power of sale, your primary mortgage would be paid out first, followed by the home equity loan.
Equity is calculated by taking the difference between the value of your home and how much you owe on your mortgage.
For example: If you have a home worth $1,000,000 and you owe $450,000 on your mortgage, then you have home equity of $550,000.
A home equity loan offers more flexible options than a traditional bank mortgage depending on how you want to use the money.
- Interest rates secured against your home’s equity are typically lower than other kinds of loans.
- The more you pay down your mortgage, the higher your home equity becomes.
- In the case of a home equity mortgage, there is more flexibility to be released from your obligation, as long as you pay a 3-month interest fee.
It can be difficult to get a home equity loan through a bank due to more restrictive loan rules. A private lender such as the Mortgage Broker Store can help you access the equity in your home, and help you manage the entire process to maximize your cash flow.
Private lenders will use the Loan to Value ratio (LTV) to determine how much you qualify for when applying for a home equity loan. LTV is equal to the value of existing debts divided by the appraised value of the property. Financial institutions like banks, credit unions and trust companies will look more broadly at things like credit score, income, employment history and other financial obligations.
When Should I Use A Home Equity Loan?
Some people will use a home equity loan for renovation projects while others may use one to free up cash from things helping pay for their children’s college tuition.
It’s important to understand that a home equity loan is another mortgage and requires repayment at the same time as your primary mortgage.
It is important to look carefully at the different options available to determine which kind of home equity loan is right for you. Each comes with different repayment obligations and interest rates. Always keep in mind that failure to make a payment could result in losing your home. Your private lender will be able to provide you with the resources you need to make an informed decision.
7 Smart Ways To Use Your Home Equity
- Renovation: Money for renovations can be used to repair or make upgrades to your home.
- Refinancing Your Home: You can borrow up to 80% of the appraised value of your home
- Home equity line of credit (HELOC) – Like a regular line of credit, a HELOC allows you to borrow money whenever you want, up to the credit limit. This line of credit is secured against your home.
- Debt Consolidation: You can use the money from this loan to pay off other high-interest debts.
- Getting a reverse mortgage – A reverse mortgage allows you to borrow up to 55% of the value of your home.
- Education: You or your children can go to school and pay the tuition fees
- Business Investing: If you need capital to fund a business, a home equity loan can be a cash source.
Can I Use My Equity To Buy Another House?
Yes, you can use the equity in your home to buy another house. There are many advantages to choosing this type of loan including:
- Lower interest rates
- You don’t have to tap into other investments
- Tax advantages
- Predictable repayment schedules
Traditional Bank Mortgage vs. Home Equity Loans
Home equity loans are different from traditional bank mortgages. Home equity loans are usually used towards home renovations or other large life expenses, while traditional mortgages are used to buy a home.
- With a home equity loan you are taking out equity you already have in the property. In the case of a traditional bank mortgage you are putting equity into the property.
- If you own your property outright then the home equity loan is not a mortgage, but rather you are borrowing against the equity in your home.
- A home equity loan can also provide you with an ongoing line of credit that you can access whenever you want.
- If you prefer a more fixed repayment schedule and set monthly payments, then a traditional bank mortgage loan is right for you.
Your private lender will work with you to help determine which option is best for you so you can have the cash you need to make your next project or investment successful.