Equity is typically understood in the context of real estate as the portion of a homeowner’s residence that has been formally paid off. In other words, it’s the current difference between A) the actual value of the property in question and B) the amount still owed on the mortgage balance.
Since a home should, in theory, always increase in value over time, equity is by far one of the most crucial ways to preserve someone’s wealth. Therefore, equity continues to increase over time as the fair market value of the home increases while the amount still owed on the mortgage decreases.
Therefore, a home equity loan is exactly what it sounds like: a way to borrow money in one lump sum from that wealth. Most lenders have fixed interest rates, which means that paying back the loan is done by making regular payments of a certain amount that stays the same.
The Benefits Of A Home Equity Loan
Home equity loans can be beneficial in many different situations, especially if a homeowner needs to finance a sizable future expense.
For instance, some people use home equity loans to consolidate their debt. They use the home equity loan to pay off the balances on a number of high interest credit cards. After that, they will only have to worry about one fixed monthly payment, probably at a lower interest rate than they had to pay for each of their previous credit cards.
Some people use home equity loans to make improvements to their homes. Taking out a loan might make sense if you were going to put the money right back into the house, depending on how much equity you have. In the long run, improvements to the home’s value, such as a new kitchen or bathroom, will essentially lead to the creation of more equity.
Home equity loans can be beneficial in other situations, too. A person may occasionally be hit with a large, unexpected expense, such as a medical bill. In that case, a home equity loan could be a practical “backup” strategy to cover those expenses if there are no other available options. Given that home equity loans typically have lengthy approval processes akin to mortgages, this wouldn’t necessarily be the fastest way to pay an emergency expense, but it is an option for the majority of people.
But Are Appraisals Necessary?
As previously stated, the application process for a home equity loan is very comparable to that of a conventional mortgage. Your debt-to-income ratio, credit score, annual income, and other details will all be taken into account by the lender you’re working with.
It makes sense that lenders would want to know the exact value of the property because a home equity loan specifically deals with the difference between the current value of your home and the amount of the mortgage that is still owed. For this reason, an appraisal is typically required in almost every situation.
A certified and experienced professional will visit your home during this process to visually inspect both the inside and the outside. They will gather as much data as they can about any changes you’ve made, any current problems, and more.
To find out how much other, comparable homes have recently sold for in the neighborhood, they will also use comparable properties, or “comps.” To identify anything they believe may have an impact on the price, they will compare the number of bedrooms and bathrooms as well as any additional features. This will also be greatly aided by exterior upgrades like a new swimming pool.
Then, they’ll incorporate that data with information obtained from MLS listings and other sources to produce a precise, conclusive estimate of the market value of your house. That report will be used by your lender to determine how much of a home equity loan you can be approved for.
Finally, keep in mind that a home equity loan ultimately draws against your home, which means that if you default on it, you risk losing your home. However, it can and frequently is a good idea in many situations if you have a plan in place to pay it back and if the money is going to something that is truly valuable.
Please don’t hesitate to get in touch with AmeriMac today if you want to learn more about the appraisal procedure and how it relates to obtaining a potential home equity loan, or if you simply want to go over your needs in more detail with a team of experts.
FAQ
What type of loan does not require an appraisal?
If you have an FHA, VA, or USDA loan, you might not need an appraisal to refinance your loan. You may be eligible for a streamline refinance in many circumstances, which eliminates the need for an appraisal. When it comes to who qualifies for a loan, each type has its own requirements.
What credit score is needed for a home equity loan?
Credit score: 620 or higher In many instances, lenders will require a minimum credit score of 620 to be eligible for a home equity loan, though the maximum score may occasionally be as high as 660 or 680. There might still be choices for home equity loans with bad credit, though.
Is equity based on loan amount or appraisal?
Home equity is the amount that is left over after deducting your mortgage debt from your home’s appraised value.
Will a bank give you a loan without an appraisal?
A mortgage with no appraisal requirement is one for a home. Most lenders offer no-appraisal mortgages for refinancing, but some may also offer them for initial loans. The threshold for no-appraisal mortgage loans is $400,000.