What is a Home Equity Loan and How Does it Work

A beautiful house model with keys.

You might have heard about people getting sizable home equity loans in times of hardship before. If you are interested in getting one of these loans but don’t know what they are, then it’s important to first explain what home equity is. Home equity is a term that refers to the amount of money that your house is worth, with the remainder of your mortgage repayments removed. Your home equity will steadily rise as your property’s price increases (which will happen naturally over time). Now that you understand what home equity is, it’s possible to explain what a home equity loan is, which is what this post will do.

What is a Home Equity Loan?

A home equity loan is a loan that will pay out the full amount of equity that you have on your home, i.e., the amount of money that’s left after your mortgage has been repaid. The answer to the question of ‘how much equity can I borrow from my home’ which is commonly asked depends entirely upon your home’s value, your mortgage, and how much of your mortgage you have paid off. If you decide to take out a loan for the full amount of your home’s equity, then you will have none remaining until you begin making repayments towards your debt.

Applying for Equity Loans

If you are interested in applying for a home equity loan, then it’s first important to do a little research and see if you will even qualify for one. A home equity loan will be handled much in the same way that any other sizable loan will be. The bank or lender will first want to do their research so that they can make sure that you will be able to make repayments, which will involve a credit check. If you do not have a good credit score, then you may not be able to apply for a home equity loan, even if you have a sizable amount of equity in your property. This is because a low credit score is indicative of a person being unreliable in repaying their debts.

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In addition to your credit score, your employment and other things are taken into consideration. If you are unemployed, you may not be able to take out a home equity loan, because the lender may not be satisfied that you would be able to repay it.

Improving Your Credit Score

If you are interested in applying for an equity loan, but your credit isn’t good enough, then you need to work toward improving your credit score. Improving one’s credit score can be very challenging, especially if your credit is very bad. The best way to improve your credit score is to take out a credit card and begin making repayments on time. An alternative to a credit card if your score is very low, and you don’t qualify for one, is to take out a credit builder card. A credit builder card will help you to boost your credit score.

Should You Apply for a Loan?

Taking a loan out isn’t something that should be done without proper planning, especially when you are using your house as collateral. You need to give serious thought to your decision to take out a loan before applying for one. Is there anything else that you can do to earn money, and are you confident that you will be able to repay the loan once it’s been taken out? If you do not think that you will be able to repay the loan, then it is a very reckless thing to do to go ahead with the application. For example, if you know that your job’s unstable, then taking out a loan could result in you losing your house if you are unable to repay it.

A lender will still give you money even if you are going to lose your job in a few months because there’s no way of them knowing whether or not your job’s stable when you make your application. Make sure that you factor in any potential changes to your employment in the future, as well as debts and bills, so you can ensure repayment is made on time.

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Taking Out a Loan

Once you have given serious thought to your decision to take out a loan and have arrived at the conclusion that you will be able to make repayments, then you can go ahead and take out a loan. The first thing for you to do is to locate a lender with whom you want to work. You need to make sure that the lender offers good interest rates and has good reviews. A lender’s customer feedback will give you an indication of whether or not they are worth borrowing from.

Negotiating Fees

Some lenders will allow you to negotiate fees with them. When you take out a loan, there are naturally going to be associated fees, especially if you take your loan out through a broker. You should try to negotiate these fees with the lender so that you can bring them down as much as possible. The fees associated with a home equity loan can be very high, so negotiating them down will allow you to save money. You should also be aware that the better your credit score, the lower the fees are likely to be (because there are fewer hoops for you to jump through).

Failure to Repay

You should be aware that if you fail to repay your loan, you could end up losing your house. When you miss a payment, you will be given a fixed period to make it. If you do not make the missed payment during this period, then you will receive a default. A default is a written notice advising that you have missed (and failed to make subsequently) a payment. A default will mark your credit score and also signifies the end of a credit arrangement. After that, your home can be repossessed.

Home equity loans are an extremely effective way of getting a large loan without needing a guarantor or having to go through the complex personal loan process. If you intend on taking out a home equity loan, then make sure that you are confident in your ability to repay it.

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