Home equity can be confusing, so here are three simple ways to define this important part of homeownership.
For the majority of homeowners, its usually not possible to purchase a home without borrowing a large chunk of the money. To take out a mortgage, you choose a lender and they loan you the money to buy the home. Youre a homeowner — but, you have a partner: you and the mortgage company both have skin in the game until the entire loan is paid off. Only then will you end up owning the property free and clear!
Owning a home is one of the greatest feelings. After years of making mortgage payments, you’ve built up equity in your property. This equity could allow you to qualify for a home equity loan or line of credit through Movement Mortgage.
But how much do you really know about home equity loans and lines of credit? Many homeowners have questions when it comes to leveraging their equity. In this article, I’ll walk through the key things to know if you’re considering a home equity loan or line of credit with Movement Mortgage.
What is Home Equity and How is it Calculated?
Your home’s equity is the current market value minus any outstanding mortgage balances you have.
For example, say your home is worth $300,000 in today’s market. You originally purchased it for $200,000 and borrowed 80% as a mortgage, so your original loan amount was $160,000. Over the last 5 years, you’ve paid down your mortgage principal to $140,000.
That means you have $300,000 in home value minus the $140,000 you still owe, leaving $160,000 of equity built up
As you can see, equity grows over time as you pay down your mortgage principal and as your home value appreciates. It’s a valuable asset you’ve built through your monthly payments and ownership.
What is a Home Equity Loan and How Does it Work?
A home equity loan lets you borrow against the equity in your home. It provides funds in a single lump-sum payout, then you repay the loan over a fixed term with set monthly payments.
For example, if you qualify for a $50,000 home equity loan at a 5% interest rate over 10 years, you would get the full $50,000 upfront to use however you wish. Then you’d make 120 monthly payments of around $560 to repay the loan over the 10 year term.
Home equity loans can be useful for large, one-time borrowing needs like home improvements, debt consolidation, medical expenses, or college tuition. But since you receive the funds in one lump-sum, it may not make sense for smaller ongoing needs.
What is a Home Equity Line of Credit (HELOC)?
A home equity line of credit (HELOC) also lets you borrow against your home equity but with more flexibility than a loan. With a HELOC, you have an open line of credit where you can withdraw funds as needed up to your approved limit.
For example if you qualify for a $50000 HELOC, you could withdraw $10,000 now for a home remodel, then pay it back over time. A year later when you need funds again, you could withdraw another $5,000 for furniture, pay it back, and repeat as needed.
HELOCs have variable interest rates, so your required monthly payment changes based on your outstanding balance. You typically only pay interest on the amount borrowed and rates are often lower than other financing options.
This flexibility makes HELOCs useful for ongoing borrowing needs over time like home improvements, small business expenses, medical bills, or education costs.
What are the Requirements to Qualify for Home Equity Financing?
To qualify for a home equity loan or HELOC, there are a few basic requirements:
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Equity – You’ll need to have enough equity built up in your home. Many lenders require you have at least 15-20% equity before borrowing.
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Credit – Your credit score and history will be reviewed, just like any loan. Minimum scores vary by lender but often need to be 620 or higher.
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Loan-to-Value (LTV) Ratio – Lenders want your total borrowing to stay under a certain percentage of your home value to minimize risk. Typical requirements are 80-90% LTV or lower.
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Home Value – There may be minimum home values required to qualify, often around $100,000 or more.
As long as you meet these types of requirements, have sufficient home equity, and receive loan approval, you can tap into your equity through Movement Mortgage.
How Much Can You Borrow Against Your Home Equity?
The amount you can borrow depends on factors like:
- Your available home equity
- Lender requirements for equity and LTV ratios
- Your credit score and history
- Overall repayment ability based on income and debts
Many lenders let you borrow up to 80-85% of your total home value minus what you owe on mortgages. Others are more conservative and limit borrowing to 75% or less of your equity.
For example:
- Home Value: $300,000
- Mortgage Debt: $140,000
- Total Equity: $160,000
With an 80% LTV limit, you could qualify for around $128,000 in home equity financing ($160,000 x 80%).
Always keep in mind that borrowing large sums against your home does reduce the equity you’ve built up over time. Be wise when considering how much to borrow against your equity.
What Are Today’s Home Equity Loan and HELOC Rates?
Interest rates on home equity loans and HELOCs rise and fall just like mortgage rates. Here are some current rate ranges as of 2023:
Home Equity Loans
- Fixed rates: 7% to 9%
- Variable rates: 5% to 7%
HELOCs
- Variable rates: 6% to 8%
So in today’s market, HELOCs tend to have lower interest rates than fixed home equity loans. But keep in mind HELOC rates can fluctuate over time while fixed loan rates remain stable.
Reach out to Movement Mortgage to check current rates. Their team can provide custom quotes for your specific situation.
What Closing Costs or Fees Are Involved?
When taking out a home equity loan or line of credit, you will incur some fees and closing costs. These can total 2-5% of your loan amount and may include:
- Origination or application fees
- Appraisal fees
- Credit report charges
- Title insurance and title search
- Recording fees
- Legal fees
Some borrowers choose to roll closing costs into the loan amount rather than paying upfront. But keep in mind that increases your total repayment and interest costs over the loan term.
Always ask Movement Mortgage for a detailed estimate of all fees so you know what to expect at closing.
How Will Home Equity Financing Affect Your Taxes?
One potential advantage of home equity loans and HELOCs is that the interest may be tax deductible for you. This can lower your tax bill each year and help offset some of the interest costs.
However, changes in tax laws mean deductibility depends on how you use the funds:
- If used for home improvements, the interest is usually deductible
- If used for other purposes like debt consolidation or vacations, the interest is no longer deductible in most cases
Consult your tax advisor to understand the tax implications in your specific situation. Never assume the interest will be deductible without checking first.
How Long Does the Home Equity Loan Process Take?
If you need funds quickly, home equity financing could provide them more rapidly than other options. Here is an overview of the general timeline:
- 1-3 Days – Apply and provide required documents
- 1-2 Weeks – Home appraisal completed
- 1-2 Weeks – Loan review and approval
- 2-4 Weeks – Closing and fund disbursement
So the entire process often takes 4-6 weeks from application to getting your funds. The exact timeline depends on factors like your home value, location, lien position, and loan amount.
Reach out to Movement Mortgage to get estimates for your specific scenario. Their team can expedite the process as much as possible.
How Can I Get Started with Movement Mortgage?
If you’re interested in a home equity loan or HELOC, Movement Mortgage has experienced loan officers ready to help. Here are some easy first steps:
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Check your equity – Use an online calculator to estimate your current home equity so you know how much you may qualify for.
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Learn your options – Reach out to a Movement Mortgage loan officer to discuss loan types, rates, fees, and more based on your specific situation.
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Apply online – Complete a quick application online to get the process started.
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Submit documents – Work with your loan officer to supply needed documents for verification and approval.
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Close and get funded – Finally, close on your home equity loan and get the funds you need.
With over 15 years of experience, Movement Mortgage has the expertise to make the home equity loan process smooth and stress-free for you. Their team is here to help you every step of the way.
Frequently Asked Questions (FAQs)
Still have some questions? Here are answers to some common FAQs about home equity loans and lines of credit:
What credit score is needed?
Typical minimum scores are around 620, but may vary by lender. The higher your score, the better the chances for approval
How home equity can help your family
Even though its tied up in your home, equity is considered a part of your net worth. Its an asset that you can tap into when you have a larger-than-normal expense that you need to make.
We already mentioned that you could borrow against your home equity to make home improvements. But did you also know you can borrow against it to purchase a second home, buy a new car, pay for a wedding, pay off student loans or cover college tuition for your kids? Or you could leave it where it is and watch it grow. Its up to you.
Building equity a little at a time
As you repay your mortgage loan, youre gradually building equity in your home. Every time you make your monthly payment, a large chunk goes to paying down the interest on the amount borrowed and a small portion goes towards paying down the loans balance — also known as the principal. As your loan balance decreases, your equity in the home increases.