What Does It Mean To Use My Home As Collateral
You use your home as collateral when you borrow money and secure the financing with the value of your home. This means if you dont repay the financing, the lender can take your home as payment for your debt.
Refinancing your home, getting a second mortgage, taking out a home equity loan, or getting a HELOC are common ways people use a home as collateral for home equity financing. But if you cant repay the financing, you could lose your home and any equity youve built up. Your equity is the difference between what you owe on your mortgage and how much money you could get for your home if you sold it. High interest rates, financing fees, and other closing costs and credit costs can also make it very expensive to borrow money, even if you use your home as collateral.
Home Equity Line Of Credit Combined With A Mortgage
Most major financial institutions offer a home equity line of credit combined with a mortgage under their own brand name. Its also sometimes called a readvanceable mortgage.
It combines a revolving home equity line of credit and a fixed term mortgage.
You usually have no fixed repayment amounts for a home equity line of credit. Your lender will generally only require you to pay interest on the money you use.
The fixed term mortgage will have an amortization period. You have to make regular payments on the mortgage principal and interest based on a schedule.
The credit limit on a home equity line of credit combined with a mortgage can be a maximum of 65% of your homes purchase price or market value. The amount of credit available in the home equity line of credit will go up to that credit limit as you pay down the principal on your mortgage.
The following example is for illustration purposes only. Say youve purchased a home for $400,000 and made an $80,000 down payment. Your mortgage balance owing is $320,000. The credit limit of your home equity line of credit will be fixed at a maximum of 65% of the purchase price or $260,000.
This example assumes a 4% interest rate on your mortgage and a 25-year amortization period. Amounts are based on the end of each year.
Figure 1: Home equity line of credit combined with a mortgage
Buying a home with a home equity line of credit combined with a mortgage
- personal loans
- car loans
- business loans
How Can You Use A Cash
There are few restrictions on how to you use the lump sum payment from your cash-out refinance loan. Borrowers have successfully used this loan to consolidate debt, make repairs or renovations to their home, or support educational expenses. Evaluate your loan options and make a decision based on your financial needs.
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How Long Does It Take To Process A Home Equity Loan
It can take 2 to 4 weeks from application to closing for a home equity loan or HELOC , depending on the complexity of the loan request.
Here’s what happens during the home equity application process:
A loan underwriter will begin by reviewing your financial profile and comparing it to the loan requirements. The process will also include verification of financial information, collection of documents to satisfy conditions of commitment, and a valuation of the property.
Additional information may be requested, including:
- A copy of the recorded deed of the property
- The most current pay stub to verify income
- The last 2 years of tax returns with all schedules
- Verification of additional income if not shown on tax returns
- Trust agreement, if applicable
- Your mortgage statement, the most recent one showing the outstanding balance on your mortgage
- A list of payoffs for debt consolidation if consolidating debt
Having documentation organized and ready at the beginning of the application process can help simplify the process, which in turn can lead to a much faster turn-around time.
Learn more about home equity by downloading our free Equity Edge eBook. This eBook will introduce you to current remodeling trends, affordability, the difference between a home equity loan and a home equity line of credit , and includes tip sheets on going green and quick home improvement projects to spruce up your home in a pinch.
Homebuyers’ Guide To The Help To Buy: Equity Loan
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How To Find The Best Home Equity Lender
Finding the best home equity loan can save you thousands of dollars or more. Shop around to find the best deal. Different lenders have different loan programs, and fee structures can vary dramatically.
The best lender for you can depend on your goals and your needs. Some offer good deals for iffy debt-to-income ratios, while others are known for great customer service. Maybe you don’t want to pay a lot, so you’d look for a lender with low or no fees. The Consumer Financial Protection Bureau recommends choosing a lender on these kinds of factors as well as loan limits and interest rates.
Ask your network of friends and family for recommendations with your priorities in mind. Local real estate agents know the loan originators who do the best job for their clients.
How Much Cash Can You Receive Through Cash
Typically, lenders will use your Combined Loan-to-Value ratio to understand your ability to take on new debt. To generate your CLTV on your own, follow these steps:
- Add up the balances on all your existing home loans such as first mortgages, second mortgages or home equity lines of credit. This is your combined loan value.
- Find the estimated value for your home. You can use an online tool, compare the sale cost of similar homes in your neighborhood, or pay for an official estimate.
- Divide your combined loan amount by your estimated home value to calculate your current CLTV.
Once you know your current CLTV, you need to find out the maximum CLTV allowed by your cash-out refinance lender. Many lenders will cap any lending at 80% of your CLTV, but Discover Home Loans allows for loans up to 90% of CLTV. Use your lenders maximum CLTV percentage and multiply that by your current homes value to calculate maximum loan amount. When you subtract your existing mortgage balance from that maximum loan amount, you will see exactly how much cash can be obtained through cash-out refinance.
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What Happens When An Agreement In Principle Expires
If your agreement in principle expires before your mortgage offer has been accepted, then you wont have any choice but to start the process all over again.
You will not be able to get a refund for fees paid, so you should consider any costs carefully before starting your application, including searching for properties and arranging valuations.
If you have already bought a property under an AIP, there is no time limit on completing that transaction. The lender cant withdraw their offer of finance just because the agreement has passed its expiry date.
Example 4 Decrease In Property Price Of A Help To Buy Home In London
- Price the property was bought for: £400,000
- Deposit paid by the buyer: £20,000
- Equity loan: £160,000
- Repayment mortgage: £220,000
The table below shows the amount of equity loan that would have to be repaid when the property was sold if property prices had fallen by 5% every year.
As the value of your home in this example is less than when you bought it, it may affect your ability to pay off your repayment mortgage and the equity loan.
To apply for an equity loan, find your local agent.
If you would like this guide in an accessible format , please email:
This guide is for information only and must not be considered advice. Consider getting independent financial advice before making any financial decisions on whether Help to Buy: Equity Loan is right for you.
Your home may be repossessed if you do not keep up repayments on your mortgage, equity loan and other loans secured against it.
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Alternatives To Home Equity Loans
If your house is fully paid off but you dont want to move, you might consider a reverse mortgage a mortgage where the lender pays you to get money during retirement. To qualify for a reverse mortgage, you have to be at least 62 years old.
Before you decide to pursue a reverse mortgage as an option for using home equity for retirement, remember that the money the lender pays you will be due once you move out, sell the property or pass away. High fees can also reduce the amount of cash you can borrow. Because of this, you may want to consider alternative ways to get money for retirement, such as:
- Downsizing. To reduce your expenses in retirement, you could sell your home and purchase a cheaper one. The money you get from the sale can be used to pay for everyday expenses. In addition, you could invest a portion of the proceeds to create an additional income stream.
- Moving to an area with a lower cost of living. If you live in an area with a high cost of living, consider selling your home and moving to a cheaper area. By moving, you could save a lot of money and stretch your retirement dollars further
What Are The Requirements For A Heloc Or Home Equity Loan
Generally, borrowers for either a HELOC or a home equity loan need:
- > 20% equity in their home
- A credit score > 600
- Stable, verifiable income history for two+ years
It is possible to get approved without meeting these requirements by going through lenders that specialize in high-risk borrowers, but expect to pay much higher interest rates. If you are a high-risk borrower, it may be a good idea to seek out a for advice and assistance before signing up for a high-interest HELOC or home equity loan.
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When Is A Heloc A Good Idea
A HELOC can be a good option if you need to access a large amount of money but dont want to pay the high interest rates that are associated with credit cards, debt consolidation programs, and store financing.
A HELOC can be used for just about anything, which makes it really flexible and a popular option for homeowners who are looking to make home improvements, consolidate debt, pay for college, or taking a major trip or vacation.
Unlike a home equity loan, a HELOC doesnt have to be provided in one lump sum. You will be given access to a line of credit, which you can draw from over time. During this time you will make payments on the money you use.
A HELOC is a good option for homeowners who have equity in their homes. Its also best if you have a good credit score and a low debt-to-income ratio.
How To Calculate Your Home Equity
To calculate your home equity estimate the current value of your property by looking at a recent appraisal, comparing your home to recent similar home sales in your neighborhood, or using the estimated value tool on a website like Zillow, Redfin, or Trulia. Be aware that these estimates may not be 100% accurate. When you have your estimate, combine the total balance of all mortgages, HELOCs, home equity loans, and liens on your property. Subtract the total balance of what you owe from what you think you can sell it for to get your equity.
Because both home equity loans and HELOCs use your home as collateral, they usually have much better interest terms than personal loans, , and other unsecured debt. This makes both options extremely attractive. However, consumers should be cautious of utilizing either. Though racking up credit card debt can cost you thousands in interest if you can’t pay it off, becoming unable to pay off your HELOC or home equity loan can result in losing your home.
Home equity loans give the borrower a lump sum upfront, and in return, they must make fixed payments over the life of the loan. Home equity loans also have fixed interest rates. Conversely, home equity lines of credit allow a borrower to tap into their equity as needed up to a certain preset credit limit. HELOCs have a variable interest rate, and the payments are not usually fixed.
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Home Equity Line Of Credit
A home equity line of credit is a revolving credit line. A HELOC allows the borrower to take out money against the credit line up to a preset limit, make payments, and then take money out again.
With a home equity loan, the borrower receives the loan proceeds all at once, while a HELOC allows a borrower to tap into the line as needed. The line of credit remains open until its term ends. Because the amount borrowed can change, the borrower’s minimum payments can also change, depending on the credit line’s usage.
You Know Exactly How Much You Need
If youre looking to make home renovations and know the exact cost of your project, a single lump sum infusion of cash is a perfect resource. Being able to pay for an entire job in one payment can make your life easier and reduce the costs of renovations in the long run. If you have a fixed budget planned and dont want to overspend, consider taking out a home equity loan over other financing options.
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The Benefits Of Getting Mortgage Advice
The advantages of seeing a mortgage adviser, usually a mortgage broker, are that you can be sure that youre filling out all of your paperwork correctly and providing the right information, as well as ensuring that there are no problems with any items on your credit file. In some cases, a financial adviser may also have contacts at specific lenders who might be more willing to help you.
Importantly they can help you make sure you get the best deal when it comes to mortgage fees.
As long as you dont miss any deadlines or fail to provide accurate documentation, then its very rare for UK mortgage offers to expire.
You Could Enjoy A Low Variable Introductory Rate On A Home Equity Line Of Credit
Special Introductory variable APR for 6 months
Variable APR after the introductory period
This rate includes discounts of } for automatic payment and } for a $60,000 initial withdrawalVariable APR Disclosures
Home equity assumptions based on a $100,000 line of credit
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Are Home Equity Loans A Good Idea
Whether a home equity loan is a good idea or not depends on your financial situation and what you plan to do with the money. Using your home as collateral carries substantial risk, so it’s worth the time to weigh the pros and cons of a home equity loan.
Fixed rates provide predictable payments, which makes budgeting easier.
You may get a lower interest rate than with a personal loan or credit card.
If your current mortgage rate is low, you dont have to give that up.
If you use the loan for home improvements or renovation, the interest may be deductible.
Less flexibility than a home equity line of credit.
Youll pay interest on the entire loan amount, even if youre using it incrementally, such as for an ongoing remodeling project.
As with any loan secured by your house, missed or late payments can put your home in jeopardy.
If you decide to sell your home before you’ve finished paying back the loan, the balance of your home equity loan will be due.
Interest Rates And Fees If You Refinance Your Home
The interest rate on the refinanced part of your mortgage may be different from the interest rate on your original mortgage. You may also have to pay a new mortgage loan insurance premium.
You may have to pay administrative fees which include:
- appraisal fees
Your lender may have to change the terms of your original mortgage agreement.
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Have A Credit Score In The Mid
A favorable credit score is essential to meet most banks approval requirements. A credit score above 700 will most likely qualify you for a loan as long as you also meet equity requirements. Homeowners with credit scores of 621 to 699 might also be approved.
Some lenders also extend loans to those with scores below 620, but these lenders may require the borrower to have more equity in their home and carry less debt relative to their income. Bad-credit home equity loans and HELOCs will have high interest rates and lower loan amounts, and they may have shorter terms.
Before applying for a home equity product, take steps to improve your credit score. This could involve making timely payments on loans or credit cards, paying off as much debt as possible or avoiding new credit card applications.
Why its important: Having a good credit score will help you secure more favorable interest rates, saving you a substantial amount of money over the life of the loan. In addition, lenders use your credit score to predict how likely you are to repay the loan, so a better score will improve your odds of approval.