Is Taking Out a Home Equity Loan Right for You?

If you have more than 20% home equity and a credit score of at least 680, there’s a good chance you could qualify for a home equity loan, also known as a second mortgage. This allows you to borrow money for about five to 30 years at a relatively low fixed interest rate using your home as collateral. While a home equity loan might make sense if you have an emergency or need to make a big purchase, you are putting your home at risk if you can't repay the loan. Because of this, consider all of your options before deciding if a home equity loan is the best choice.

Key Takeaways

A home equity loan lets you borrow against the equity you have built up in your home, providing a single lump-sum payment that can be useful for financing big-ticket items or consolidating higher-interest debt.
However, because you are using your home as collateral for the loan, you risk losing it if you default on the loan.
Home equity loans come with low fixed interest rates and repayment periods of anywhere from five to 30 years.
澳洲幸运5官方开奖结果体彩网:Alternatives to home equity loans include home equity lines of credit (HELOCs), personal loans, and low-interest credit cards.

Understanding Home Equity Loans

A 澳洲幸运5官方开奖结果体彩网:home equity loan, a kind of 澳洲幸运5官方开奖结果体彩网:second mortgage, lets you borrow against your home’s value. It works similarly to a 澳洲幸运5官方开奖结果体彩网:first mortgage, but the interest rates are slightly higher. You borrow a lump sum all at once and make identical monthly payments of principal and interest for the next five to 30 years, depending on your chosen loan term. Your home is 澳洲幸运5官方开奖结果体彩网:collateral for the loan, so if you don’t repay what you borrow, you could lose your home in 澳洲幸运5官方开奖结果体彩网:foreclosure.

How Much Equity Do You Have?

The first step in 澳洲幸运5官方开奖结果体彩网:deciding if a home 🌸equity loan is r👍ight for you is knowing how much 澳洲幸运5官方开奖结果体彩网:home equity you have. This will give you an idea of🌞 whether you’re eligible a✃nd how much you might be able to borrow.

Your home equity is the difference between your home’s 澳洲幸运5官方开奖结果体彩网:appraised value and mortgage balance. If your home is worth $450,00📖0 and you owe $225,000, your equity is 50%. If you’ve paid off your mortgage completely, your💜 equity is 100%.

To determine how much you can borrow with a home equity loan, calculate a 澳洲幸运5官方开奖结果体彩网:combinedꩲ loan-to-value (CLTV) ratio. Most home equity lenders allow a CLTV ratio of at least 80% on your main home, though Regions Bank goes to 85% and Discover reaches 90%.

Again, let’s say your home is worth $450,000 and you owe $225,000 on your first mortgage. Multiply $450,000 by 0.8 to get how much debt most lenders will be comfortable letting you carry against your home: $450,000 x 0.8 = $360,000. Then subtract $225,000 from that: $360,000 - $225,000 = $135,000. This is how much you can borrow.

What Else Do You Need to Qualify?

The minimum 澳洲幸运5官方开奖结果体彩网:credit score to get a home equity loan depends on the lender, but it is typically at least 680. Keep in mind that merely qualifying will not get you 澳洲幸运5官方开奖结果体彩网:the best available rate, and you might not get approved for a CTLV ratio as h🍰igh as someone with excelle💧nt credit would.

You’ll need to provide pay stubs, income tax returns, and bank statements to lenders to document your income. You’ll need to show that you have enough stable income to afford the additional monthly payment and 澳洲幸运5官方开奖结果体彩网:not too much debt.

Warning

Per the 澳洲幸运5官方开奖结果体彩网:Fair Housing Act, mortgage lending discrimination is illegal. 澳洲幸运5官方开奖结果体彩网:If you think you’🦩ve been discriminated against based on “race, color, religion, sex (including gender, gender identity, sexual orientation, and sexual harassment), familial status, national origin, or disability,” there are steps you can take. One such step is to file a report with the Consumer Financial Protection Bureau (CPFB) or the U.S. Department of Housing and Urban Development (HUD).

Many home equity lenders like to see a debt-to-income (DTI) ratio no higher than 43%, meaning that your monthly mortgage, student loan, auto loan, credit card, and proposed home equity loan payments should not be more than 43% of your pretax income.

Do You Want to Use Your Home as Collateral?

A home equity loan, like other home loans, is secured by your home. If you don’t repay it, you could end up in foreclosure. Yes, you’re already in this situation if you’re carrying a first mortgage. However, additional borrowing against your home increases the risk of falling behind on payments if your♛ finances worsen𒊎.

You might consider an unsecured personal loan if you don’t want to use your home as collateral.

Important

The consequences of 澳洲幸运5官方开奖结果体彩网:defaulting on any loan are serious and include difficulty obtaining future credit and potentially being sued by your creditors, who may even obtain a 澳洲幸运5官方开奖结果体彩网:judgment lien on your home. However, you’re less likely to lose your 澳洲幸运5官方开奖结果体彩网:principal residence when you’re not using it to secure your loan.

Do You Want the Lowest Possible Monthly Payment?🦋

You start repaying a home equity loan’s principal and interest from your first monthly payment. However, with a home equity line of credit (HELOC), many lenders offer the option to pay only the interest on what you’ve borrowed for the first 10 years. In addition, the starting interest rate is usually lower than a home equity loan’s starting rate. In exchange for these initial rewards, you have to take on more risk. HELOCs have a 澳洲幸运5官方开奖结果体彩网:variable interest rate that’s tied to the 澳洲幸运5官方开奖结果体彩网:prime rate.

In turn, the prime rate is influenced by the 澳洲幸运5官方开奖结果体彩网:federal funds rate. The 澳洲幸运5官方开奖结果🤪体彩网:Federal Open Market Committee (FOMC) meets eight times a year and if it decides that inflation is too high, it will take steps to increase the federal funds rate. Your HELOC’s rate is likely to follow.

Further, when you don’t pay principal for the first 10 years of your HELOC, you’re betting that you’ll have an easier time reꦿpaying that money in the future than you would today. If your bet turns out to be wrong, you could find yourself with some seriously unmanageable debt, especially if interest rates are substantially higher.

Do I Have to Get a Home Equity Loan From the Same Company That Services My Existing Mortgage?

No. While your loan servicer might send you offers to advertise its home equity loan rates, you can get a home equity loan from any lender who approves your application. You shouꦅld definitely shop around wi🎉th multiple lenders to make sure 𒊎you get the lowest rate and 🌃fees possible.

Can I Deduct the Interest on a Home Equity Loan?

You may be able to deduct the interest you pay on a home equity loan if you use the money “to buy, build or substantially improve the taxpayer’s home that secures the loan,” according to the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS). As the 澳洲幸运5官方开奖结果体彩网:Tax Cuts and Jobs Act (TCJA) of 2017 nearly doubled the 澳洲幸运5官方开奖结果体彩网:standard deduction and lowered the amount of combined mortgage debt on which you can deduct interest to $750,000, many people won’t save much, if anything, from the mortgage interest tax deduction. You’ll need to do the math to see if the possible tax deduction could make this loan an attractive choice for you.

The TCJA is set to sunset in 2026. If Congress allows it to expire, which would reinstate the previous laws, homeowners will be able to deduct mortgage interest regardless of how they spend the money, the standard deduction will become less appealing, and interest on mortgage debt up to $1 million will be tax deductible. In🥂 short, it’s hard to say whether you’ll be able to deduct your home equity loan interest now, let alone in 2026 and after.

Should I Pay Off My High-Interest Debt With a Home Equity Loan?

Maybe. Home equity loan rates are much lower than credit card rates, so your monthly savings could be substantial. Home equity loans also have a fixed term, unlike credit cards, meaning that, at least in theory, you’ll eventually be debt free. We say in theory because you might be able to continually refinance your home equity loan, although that possibility hinges on a lot of variables, including home value, interest rates, income, overall debt, and 澳洲幸运5官方开奖结果体彩网:credit score.

A home equity loan might also give you access t📖o even more borrowing power than you had with your credit cards. If you’re not careful, your debt situation could get more un💃tenable.

Finally, taking💦 up to 10 years to repay your cr𒈔edit card debt with a home equity loan could mean that you’ll pay much more interest in the long run. On the other hand, you’ll get a fixed interest rate and inflation will make those fixed monthly payments less and less painful over time. Inflation benefits debtors.

The Bottom Line

Taking out a home equity loan may be right for you if you want to borroཧw a lump sum at a fixed interest rate, repa⛄y the loan with stable monthly payments over anywhere from five to 10 years, and are comfortable taking on additional debt secured by your home.

If you want to borrow smaller sums as needed, a HELOC might be a better choice. If you don’t want more debt secu🐽red by your home, a low-interest credit card might be the way to go. However, you will have to be able to manage the monthly payment swings caused by variable interest rates.

An 澳洲幸运5官方开奖结果体彩网:unsecured personal loan is another way to borrow at a fixed interest rate. The interest rate may be higher, the term may be shorter, and you may not be able to borrow as much as you could get with a home equity loan. However, this type of loan will not directly pౠut you at risk ဣof losing your home.

Finally, if you’re considering borrowing money for something that would be nice to have but isn’t a necessity, consider leaving your equity alone and not taking on additional debt. Many people enjoy t🔯he sense of security that comes from owning their home outright.

澳洲幸运5官方开奖结果体彩网