Things You Need To Know Before Opting For A Home Equity Loan

As home prices continue to skyrocket, home equity loan is becoming a more accessible, more attractive, and genuine source of cash for millions of people. How does a home equity loan work? This should be the first question you should ask when opting for a home loan.

What Is Home Equity?

Home equity is a homeowner’s interest in a property. It can increase over time if the house value increases or the mortgage loan balance is ultimately paid. You’re considered to own your property, but if you were funded to buy it, your lender also has an interest in it until you meet the terms of the loan.

Getting funds against home equity can be a convenient way to access cash, but it also associated with risk, as millions of people living in American learned in the housing crisis of 2008. If you want to opt for home equity, it is ideal you ask yourself how does a home equity loan work? Here’s what you need to know.

  • It’s Getting Easier To Qualify

Since cracking down on credit after the housing bust, lenders are starting to loosen up once again. However, you will need to prove you’ve got the credit score and income to pay off the loan. Lenders want borrowers with a credit score of 700 at least and whose total debt amounts is less than 43 percent. The total HELOC and your mortgage balance can’t amount to more than 80 percent of your property’s value, although some lenders are letting consumers borrow 85 percent or more.

  • The Tax Rules Have Changed

Under the new tax law, the home equity interest is tax-deductible if you’re using the funds for home renovations on the property tied to the loan. The total amount of home equity debt plus your mortgage that qualifies for the deduction can’t exceed $750,000.

It makes sense to consider using HELOC for other purposes, such as college tuition or debt consolidation, but there’s no longer a tax benefit to doing so.

  • You’ll Need To Shop Around

Get a quote from your lender, as well as from at least three others, including a local credit union and an online bank. Use these quotes to negotiate to make sure that you’re getting the best deal. If you’re able to answer the question how does a home equity loan work?  It can help you to find reasonably wide variances in price, accessibility, interest rates, and terms from place to place across town.

Since more HELOCs are variable rate loans, you’ll need to know the current interest rate as well as the lifetime cap and the maximum possible rate you’ll pay if interest rates go up the hill.



  • There Are Real Risks Involved

On the off chance that you’re unable to make payments, your lender can foreclose. If you have a variable rate loan, your monthly payment amount will increase along with interest rates. Minimize the effect of the rate increase on your budget by paying off principal on time.

Furthermore, while home prices keep rising in recent years, there’s no guarantee they will continue to increase. If the housing market stalls and the value of your home declines, you could end up having a balance that exceeds the current market value of the loan. The more equity you keep in your property, the more secure you’re against market fluctuations.


David Jackson

David is a personal finance expert, a professional male model, and an entertainment writer.