If you want to borrow a large sum of money, a home equity loan may be worth considering. Like with all major decisions, though, it’s important to contemplate both the positive and negative outcomes.
A home equity loan allows you to borrow (with interest) any equity you have built up in your home. Often, these loans are used for necessary expenses such as home repairs, medical bills or school tuition. They can also be used for home upgrades, such as new floors, an addition or a pool.
It’s important to shop around for the best loan for you. Some banks charge closing costs or other fees for a home equity loan; others may not. Some institutions offer a seven-year repayment period, while others may be more flexible. We recommend securing a loan with a fixed rate. You don’t want any surprises in your payments if the stock market or housing market goes crazy. Again, ask a lot of questions, and find the lender that is willing to work for you.
Because equity is the difference between how much you owe and how much your home is worth, the first step is to get a home appraisal to find out what your home is worth versus how much is left on your original mortgage. Your bank or credit union of choice can help you with this process. They will also run a credit check to determine your credit score and your existing debt-to-income ratio. A score above 700 should qualify you for a home equity loan with a low interest rate.
- Home equity loans are secure loans, which mean their interest rates tend to be lower than rates of other consumer debts.
- You can spend a home equity loan on whatever you wish. There are no restrictions.
- If your credit score is not top of the line, a home equity loan is one of the easiest loans to obtain as long as you have home equity.
- If you fail to make payments on your home equity loan, your home could end up in foreclosure.
- If you only need $10,000 from the bank, but are approved for $15,000, the temptation to spend the extra $5,000 could put you in unexpected debt. Only borrow what you need and can afford.
- Fixed rates for home equity loans may be higher than those of fixed-rate primary mortgages, particularly if your credit isn’t stellar.