Your home is not only a place to live and it is not only an investment. It can also be a source of cash if you need it through refinancing or a home equity loan. Refinancing repays an old mortgage in exchange for a new mortgage, preferably at a lower interest rate. A home loan gives cash in exchange for the capital accumulated in the property. Can you get a home equity loan with no equity?
Home equity loans
Home loans tend to have lower interest rates than personal, unsecured loans because they are secured by your property, but there is a catch: the lender can come after your home if you do not comply with the conditions. a traditional home loan in which you borrow a lump sum and a home loan line (HELOC).
HELOC is like a credit card linked to equity in your home. For a limited time after receiving it, known as the drawing period, you can generally borrow as little or more of this credit line as you like, although some loans require an initial withdrawal of a certain amount. You may need to pay a transaction fee each time you withdraw or inactivity fees if you do not use your credit line at any time within a specified time. During the draw, you only pay interest on what you borrow. When the drawing period ends, the credit line also ends. You start paying off the principal and interest when the repayment period begins.
A traditional home mortgage loan is often called a second mortgage. You have your basic mortgage and now you have a second loan for equity built in the property. The second loan is subordinated to the first – in the event of default, the second lender stands behind the first to collect any foreclosure proceeds.
Housing loan qualification
Home loans work much like a mortgage or car loan. The borrower receives a lump sum of money, which is repaid at a fixed time at a fixed interest rate. In 2019, rates were on average around 6%, and some were available for a lower rate and excellent creditworthiness.
Conditions are fairly standard, from 5 to 15 years old, although some can be up to 20 years old. By the way, approval is not guaranteed.
Banks are much more cautious after the housing crisis in 2008, when it was more a stamp operation. Lenders evaluate your application and generally make sure that the 80% loan-to-value ratio is not exceeded.
Steps to take before applying for a home equity loan
Once you decide that a home loan is the best option for your financial needs, there are several steps that can ensure a smooth loan process.
Determine how much you need to borrow. Get forecasts for the services you need if your project includes something like a wedding or home renovation.
What are the fees and closing costs associated with a new loan? For some lenders, a second mortgage may include fees such as initial fees, pricing, registration and registration fees.
Is your loan in good shape? You can get a free copy of your credit report every year.
Calculate how much you can potentially borrow from equity to meet your needs.