How Do Home Equity Loans Work?

Home equity loans have become increasingly popular over the years and especially since the pandemic hit. 

With more jobs at risk, it’s now important than ever to have access to your money. In this article, we are going to explain everything there is to know about home equity. 

You will learn what a home equity loan is, how to qualify for one, and the advantages and disadvantages.

What is a Home Equity Loan?

A home equity loan is when you borrow money and use your home as collateral. The amount you can borrow is calculated depending on how much of the property you own. If your house is valued at $500,000, but you have a $250,000 mortgage, then you may be able to borrow up to $250,000.

However, if you fail to pay back the loan, your house is at risk of being repossessed.

When taking out a home equity loan, the price of your house isn’t the only consideration. The lender will also check your credit score and previous payment history.

Alternatively, if you don’t have a mortgage, you can borrow against the full price of your home.

How to Qualify

We recommend having a credit score above 700 if you want to be successful in your application, but apart from having a good credit score and payment history, there are additional things to consider before applying for a home equity loan.

Your mortgage broker will also assess your debt to income ratio (DTI). This metric determines how much money you make vs how much debt you have. If you want to qualify for a home equity loan, keep your DTI below 43%.

If you meet these guidelines, getting a home equity loan shouldn’t be overly difficult.

The Advantages and Disadvantages

While a home equity loan may sound great, it isn’t all sunshine and rainbows. That’s not to say it’s a bad idea, there are just some things you need to take into consideration. At Easy Mortgage Lend, we believe you should consider all avenues before making a decision, especially when it involves money.

Let’s start with the advantages…

A home equity loan has a fixed interest rate, so the rate you will pay won’t change during the term of your agreement. Of course, there will still be interest due, but it is lower than other types of loans.

You will also be able to obtain a lot of money in a short period via bank transfer, which makes the whole process a lot easier. Once you have the money, you can use it however you please. This is great if you require a large sum of money to start a business for example or pay off existing debts.

A downside of a house equity loan is you run the risk of losing your home if you can’t pay it back. That’s why we recommend planning out your finances and having some money saved before proceeding.

Bottom line

Taking out a home equity loan is a great way to get a large sum of cash without paying excessive interest rates. The benefits outweigh the negatives, which is why these types of loans are often preferred by homeowners.

Providing you are sensible with money and don’t have a bad credit score, getting a home equity loan should be relatively simple.

Get In Touch With Us

If you’re thinking about getting a home equity loan, get in touch with one of our specialists or call us at (647) 895-3921. Our mortgage brokers are more than happy to answer any questions and guide you through the process.