Cost for the use of a loan, usually expressed as a percentage of the loan, paid over a specific period of time. The interest rate does not include fees charged for the loan. See also: annual percentage rate (APR).
You may have the option to borrow against a portion of the available Glossary Term: equity in your home if the remaining Glossary Term: principal you owe on your home is only a portion of its current value. For example, if you’ve been paying down the principal balance on your mortgage or the value of your home appreciates, you may be able to tap into a portion of your accumulated equity. Two popular options for doing this are a home equity loan or a home equity line of credit.
Here, we’ll talk about home equity loans.
The rate. A home equity loan features a fixed Glossary Term: interest rate, which means your monthly payments will be the same. This payment stability can make it easier to budget around this type of loan. As an added bonus, the interest paid on a home equity loan is usually tax deductible, so you could potentially save on the interest you pay. (Everyone’s situation is different, so you should talk to your tax advisor regarding interest deductibility for your personal situation.)
Qualifying. In order to qualify for a home equity loan, you must have available equity in your home. In other words, the amount you owe on your home must be less than the value of your home. Most lenders will allow you to borrow up to 85% of the value of your home minus the amount you owe. Your lender will also typically look at your Glossary Term: credit score and history, employment history, monthly income, and monthly debts, just like they did when you first got your mortgage.
Maximum loan amount. Your lender will calculate the maximum loan amount you can borrow. Here is an example of the calculation:
Assuming the lender allows a maximum loan amount of up to 85% of your home's value and your home appraises for $300,000, if you owe $150,000 on your current mortgage you may qualify for a loan amount of up to $105,000. ($300,000 x 85%= $255,000 - $150,000 = $105,000)
The home equity loan checklist
While many lenders offer the same features in their home equity loans, some features will vary. Comparing these points as you shop could make a difference in your payments:
So before you get a home equity loan, consider things like whether a fixed-rate loan suits your needs, how much you think you’ll need to borrow over what period of time, and whether you’ll be able to make the payments in full and on time in order to maintain your credit rating and keep your homeownership secure. Since your house is used as Glossary Term: collateral for your home equity loan, it’s important not to fall behind in your payments and put your home at risk.
When borrowing from a home equity loan, mortgage, credit card or any other credit product, it’s important to borrow only the amount that you can comfortably afford.