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How Does a Home Equity Loan Work?

How Home Equity Works

How a Home Equity Loan Can Work for You
 
You have probably heard it many times: your home is a valuable asset. And you’ve also probably heard that you can put your home to work for you. Both are true. With a home equity loan, you get funding in one lump sum and pay it back with equal monthly payments throughout the loan term. While you use your home to secure the funding, the rate is typically lower than many other secured or unsecured loans as a result. Thus, it’s a great option for home improvements, a medical costs, a vacation, debt consolidation or almost any other large expense.

How to qualify for a Home Equity Loan

Most lenders require 15% equity in your home before you’ll be considered for a home equity loan. While lenders will loan up to 90% of the value of the home, you will have to have that much in equity to borrow against it. Equity happens in one of two ways. First, as you continue to make your regular mortgage payments, your principal goes down and you gain equity as a result. Second, your residence may have increased in value since you bought it and it’s appraised at a higher price. Most likely, you will generate equity by a combination of the two.
 
Obviously, you will also have to have the credit rating to qualify. Even though you are securing the loan with your home, it’s still a large expense and essentially a second mortgage – so the criteria will be relatively high. Typically, a score of 620 or better and no more than 45% in debt to income.

How This Is Different From a Line of Credit
 
A home equity line of credit, also known as a HELOC, is a revolving credit line at a variable rate where you pay back only what you use – similar to a credit card. With a home equity loan, you receive the full amount of the loan and you will make fixed payments over a term set from the beginning. It works more like a car loan.

A Word of Caution

Your home ends up being pledged as collateral for your loan. In other words, if you fail to repay your loan, the lender has the ability to seize your house. Thus, there is some risk in taking out a home equity loan. However, managed responsibly, a home equity loan is a great way to secure funds for large expenses at a rate lower than an unsecured loan.

Home Equity Loans Can Be an Inexpensive Source of Credit

This is the primary reason why people will tap into their home equity. It can be a cheap source of credit and easier to get since your home is pledged as collateral. You will get a lower interest rate than you would if you took out a personal loan because it’s secured by your property. 

If you are interested in using the value of your own home and putting it to work for you, contact Truliant to discuss our home equity options. This may turn out to be your best bet to get credit for doing the things that you want or need.

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