Tapping into your home’s inherent value happens to be one of the most common ways to obtain funds. As a property owner, you must be aware of the different types of home equity loans that you can avail of.
Visit this page to explore how to get a home equity loan.
Before you finalize your decision on which type of home equity loan you should choose, it would be wise to talk to an expert who can explain all the accessible options.
In this article, you will get to know about the common types of home equity finance options.
What Is Home Equity Financing?
Simply defined, a home equity loan is an amount that you can secure by tapping into the equity or value in your primary or vacation home. You can also secure the funds using any kind of residential property that you own, including second homes. Once you obtain the financing, you reserve the freedom to channel the funds in different avenues based on your priorities.
Now, homeowners might be wondering what home equity actually is. Home equity is the difference between the property value of your home and the amount that you owe to the property. For instance, if the property value is $500,000, and you owe $100,000 in terms of a home loan, the remaining usable equity would be $400,000.
Types Of Home Equity Financing
Home equity financing is an umbrella term encompassing all the loans that you can obtain by tapping your home’s equity as collateral. Compared to unsecured loans, home equity loans come at lower interest rates. Besides, property owners can obtain relatively larger amounts by using their home equity compared to unsecured loans.
Moreover, you can choose from flexible repayment options. Even if you do not qualify for an unsecured loan due to a poor credit score, you can get home equity financing.
Have a look at the different types of home equity financing options you can go for.
1. Fixed-rate home financing
Fixed-rate home financing happens to be one of the most common ways through which you can use the equity of your home. The creditor would provide you with a single lump-sum amount based on your eligibility. Now, you simply need to repay the amount at a fixed rate of interest over a period of time.
In the case of fixed-rate home financing, the interest rate and monthly amount remain the same throughout the entire tenure. In general, the repayment tenure ranges from five years to fifteen years. If you want to sell off the property before the tenure terminates, you must pay the amount in full.
Homeowners opting for a fixed-rate home equity loan need to shell out closing costs similar to those involved in closing normal mortgages. You can save significantly by choosing a creditor offering the loan at lower interest. When you reach out to the experts, they would factor in the closing costs and other involved expenses and help you choose the right lender.
If you have a one-time cash requirement, it would be logical to go for a fixed-rate home equity loan.
2. HELOC (Home equity line of credit)
A Home equity line of credit (HELOC) is a secure home equity financing provision, but it is different from a regular home equity loan. In this case, you need to submit an application for an open line of credit.
Based on the approved amount, you have the freedom to borrow a specific amount based on your needs. This implies that you need not use the amount you would not need. Besides, the lender would charge interest only on the amount you borrow.
A HELOC remains open for a specific time, usually around ten years. The prime benefit of going for a HELOC is the liberty of the property owner to borrow only the necessary amount. As the loan balance keeps growing, the interest payments will also rise. Also, when you pay back the funds, the amount becomes re-advanceable.
Unlike a regular home equity loan, you would need a healthy credit score to qualify for a HELOC. This type of financing option comes with more stringent qualifying criteria.
3. Cash-Out Refinance
Refinancing a mortgage refers to the process of clearing your ongoing mortgage loan by taking a new loan. As a homeowner, you have the option of taking this new loan from the same creditor or a different one. Usually, homeowners go for cash-out refinancing when they find a low-interest rate creditor. Besides, you might want to increase or decrease the mortgage term with a cash-out refinancing option.
Before finalizing your decision, make sure to compare the terms and policies along with interest rates from the leading lenders. Based on these factors, you might be able to save substantially on interest over time. For instance, you can enjoy lower monthly repayments if you decide to increase the tenure of the loan while refinancing.
This financing provision also entitles borrowers to refinance the existing mortgage for an amount greater than what they presently owe. This implies that they can take the cash difference to ease their financial flow.
What Is A Second Mortgage?
At times, a home equity loan might be recognized as a second mortgage. If a homeowner has a primary mortgage that they need to settle to foreclose or sell the property, they may avail of an additional mortgage. This would be the second priority of the property owner and is referred to as a second mortgage. Depending on your home’s equity, your eligible borrowing amount would vary.
Your financial stature and specific requirements largely determine your home equity financing needs. If you prioritize greater flexibility in terms of the borrowing amount, HELOCs would be ideal for you. Again, if you need the amount just once and are ready to lock into a fixed rate, go for a fixed-rate home equity loan. Further, you can choose from other options such as refinancing and second mortgages. Regardless of your situation, it makes sense to consult one of the reputed professionals and make an informed decision.
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