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Home Equity Loan Basics

As home values start to tick up (ever so slightly), many homeowners can now entertain the thought of a home equity loan to help pay for major expenses. This can be for the obvious; home improvements, but many people also use it for college expenses, major purchases or even car loans because the interest is usually tax deductible.

If you’re new to the home equity arena, here are a few basics that you really should know before walking in and signing papers on anything.

  • What is it? According to Investopedia, Home Equity is defined as the value of ownership built up in a home or property that represents the current market value of the house less any remaining mortgage balances. So the more you “own” your house, the more equity you have and the more you can borrow against it.
  • How do I qualify? Once you determine that you have available equity in your home (your credit union can help you with that) many lenders can allow borrowers to borrow between 80 and 85 percent of their home’s value, minus what they still owe. If you already have a home equity loan, it usually has to be paid off too. Of course there are other factors that may play a role in your qualifying for a loan including your credit score, your credit history, your monthly income, any current debt that you carry, etc – much of the same factors that played a role in qualifying for your original mortgage. 
  • What will the interest rate be? Any home equity loan will include a fixed interest rate, meaning your monthly payments will remain the same over the term of the loan, offering an easier way to budget around your payments. Your interest paid on your loan may even be tax deductible.
  • How do I receive the money? Once your loan is approved, you will receive the amount you borrowed in one lump sum. This will usually be deposited into an account that you will use to draw from at any time. You do not need to use if for one purpose or draw all the money out at one time. Similar to an auto loan, you own the money and are now responsible to make loan payments on it for the period of the loan.
  • Any pitfalls? The one thing you need to be aware of is that a home equity loan uses your house as collateral. So, if you fail to repay the loan, the lender has the right to take your house. For this reason, make sure you’re very secure with the loan payment you’re agreeing to and make sure you don’t use home equities to pay for frivolous expenses.

Abri Credit Union has some pretty good folks that can answer any of your home equity questions or you can go online to our Home equity FAQs.  

Hope this information helps and thanks to IMN, Inc. for being a resource on this article.


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