How does a Home Equity Loan work?
When you apply for a home equity loan, the lender will have your home appraised to see how much it is worth. If you currently have a mortgage loan against your home, the lender will subtract the outstanding loan balance from your home’s appraised value. The resulting value is the amount of equity you have in your home (home equity). The lender uses the value of your home equity to determine how much you can borrow for a home equity loan. How much of a home equity loan can I qualify for? A lender will base your allowable home equity loan on a percentage of your home’s equity. Conservative lenders will limit your home equity loan to 80% of your home equity, while more aggressive lenders will allow a borrower home equity loan to exceed the home’s appraised value. When getting a home equity loan, you can either get a fixed rate loan or a home equity line of credit (HELOC). With a home equity line of credit loan, you are given a maximum amount that you can borrow from any time.
Your home has a market value, which is an approximate figure of how much the home is worth. It is the amount that your home would probably sell for right now if you were to put it on the market and find a willing buyer. If the amount of money you owe on your home is less than the market value of your home, then you have equity. Equity refers to the amount of money resulting from this simple transaction: Market Value – Mortgages = Equity Examples of instances when equity may increase in your home include: • You make a payment to the principal balance • You complete an improvement project to the home that increases the value • You encounter a value appreciation due to real estate sales trends In other words, any time you bring your balance down or bring the value of your home up, there is a potential for more equity.
I’m not sure why you would want to get a home equity loan to pay off student loans. Typically interest rates on student loans are much lower than home equity loans. It is true that you can use interest paid on a home equity loan as a tax deduction, but you can also use interest paid on student loans as a deduction.
A home equity loan is a secured loan and the collateral is the equity in your house. If you default on the loan repayments then your house may be repossessed. Benefits of being secured Being a secured loan it has several benefits attached with it. First you will have a lower interest rates and secondly you can get fixed or variable loan package according to your needs. How much you can Borrow With Secured Loan You can borrow up to 125% of your homes value. Usually secured loans offered range from $5,000 to $75,000 for a loan term of 5 to 25 years. Mostly the amount you will be allowed to borrow will depend on the equity in your house and your financial situation. How to Choose the Best Home Equity Loan To choose the best option you must have to shop around. Credit unions, banks, mortgage lender, and other financial institutions are the sources of getting a home equity loan. Most of the lenders are working with the prime rate which means they take applications of people with good credit
