If you’re thinking of applying for a home equity loan, here are 5 things you need to know:
- Loan-to-Value Ratio: To figure out this number, the lender adds your current mortgage and the amount of equity you want to borrow against divided by your home’s current value. Most banks require this ratio to be 80% or less. If you have excellent credit, some banks may issue home equity loans up to 95% of the loan-to-value ratio.
- Home Equity Line of Credit (HELOC): This is a type of equity loan that works similarly to a credit card or personal line of credit. Unlike a tradition equity loan, this loan is repaid at a variable rate over a set time. Some lenders may allow you to renew the loan after it’s paid off, but that’s not always the case.
- Tax-Deductible Mortgage Insurance: Just like your regular mortgage, home equity loans and HELOCs charge interest. If you itemize deductions on your taxes, you could save thousands of dollars by deducting the interest on these loan products.
- Higher Rates than Traditional Mortgages: Shop around to find the best rates because home equity loans do tend to have higher interest rates than first mortgages. Having a great payment history and good credit helps you find lower interested loans.
- Take Out Only What You Need: It’s tempting to take out as much as you’re approved for even when it’s more than you need. Remember that the housing market fluctuates. You don’t want to find yourself underwater on a home equity loan if you need to sell before it’s paid off.