Second mortgages or home equity loans are becoming popular again. Interest in these loan options dipped after the recession, but as people take charge of their finances once more, interest is picking up. If you want to learn more about home equity loans and see if you might qualify, you’ve come to the right place.
How to Qualify for a Home Equity Loan
To qualify for a home equity loan, you need to have equity in your home. Equity is the value of the portion of the home you own outright, compared to the portion still financed by the bank. This is also known as your loan-to-value ratio—the balance you still owe compared to the total value of your property.
According to a report by credit.com on the Home Buying section of Fox Business, lenders generally require you to have a loan-to-value ratio of at least 80% after taking out a home equity loan. In other words, you need a minimum of 20% ownership to qualify for this type of loan.
For example, if you have a $500,000 home and want to qualify for a $50,000 home equity line of credit or loan, you would need at least 30% equity, meaning your loan balance should be no more than $350,000.
Types of Home Equity Loans
There are two types of home equity loans: a standard home equity loan and a home equity line of credit (HELOC). A HELOC allows you to borrow in smaller increments, similar to using a credit card’s credit limit. A standard home equity loan provides a lump sum and doesn't allow borrowing beyond the set limit.
Both loans have specific terms, interest rates, and borrowing limits. Choose the loan type that best suits your needs based on the amount of money you need now and your future ability to repay.
Getting a Home Equity Loan
Most people who need a large sum for home renovations opt for a lump sum home equity loan. This is also a popular choice for those looking to consolidate debts, as it offers more manageable payments and lower interest rates compared to credit cards (though typically higher than mortgage interest rates).
Conversely, those with a variable need for funds often prefer a HELOC because it allows borrowing only what is currently needed, up to a certain limit.
Regardless of the type of second mortgage you choose, ensure you can repay it and fully understand the risks and terms before signing. Professional mortgage brokers can help you navigate this process, ensuring your loan helps you manage your finances rather than creating problems. Need a second mortgage? Contact us at Homebase Mortgages today!
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