{"id":109,"date":"2022-10-06T05:37:13","date_gmt":"2022-10-06T05:37:13","guid":{"rendered":"https:\/\/www.privamortgage.com\/blog\/?p=109"},"modified":"2023-09-14T07:08:01","modified_gmt":"2023-09-14T07:08:01","slug":"home-equity-loan-what-is-it-and-how-does-it-work","status":"publish","type":"post","link":"https:\/\/www.privamortgage.com\/blog\/home-equity-loan-what-is-it-and-how-does-it-work\/","title":{"rendered":"Home Equity Loan \u2013 What is it and How Does it Work?"},"content":{"rendered":"<p><span data-preserver-spaces=\"true\">You have\u00a0<\/span><strong><span data-preserver-spaces=\"true\">home equity<\/span><\/strong><span data-preserver-spaces=\"true\">\u00a0if you\u2019ve paid off some of your mortgage. This means you have a stake in the home\u2019s value. If you sold the house today, you\u2019d receive the equity in cash. But while you live in the home, that money sits there as long as you own it.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">The good news is you can tap into it using a\u00a0<\/span><strong><span data-preserver-spaces=\"true\">home equity loan<\/span><\/strong><span data-preserver-spaces=\"true\">.<\/span><\/p>\n<h2><strong><span data-preserver-spaces=\"true\">What is a Home Equity Loan?<\/span><\/strong><\/h2>\n<p><span data-preserver-spaces=\"true\">A home equity loan is a mortgage. It takes a second lien position behind the\u00a0<\/span><strong><span data-preserver-spaces=\"true\">first mortgage<\/span><\/strong><span data-preserver-spaces=\"true\">. It uses your home as collateral, just like your first mortgage, but it provides access to the equity you\u2019ve built.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">Home equity loans usually have a fixed rate with a 5 to 30-year term, and your home is the collateral, but the loan is in the second lien position. This means the first mortgage lender gets paid first; then,\u00a0<\/span><strong><span data-preserver-spaces=\"true\">home equity lenders<\/span><\/strong><span data-preserver-spaces=\"true\">\u00a0get paid when you sell the property or if you default.<\/span><strong><span data-preserver-spaces=\"true\">\u00a0<\/span><\/strong><\/p>\n<h2><strong><span data-preserver-spaces=\"true\">How Does a Home Equity Loan Work?<\/span><\/strong><\/h2>\n<p><span data-preserver-spaces=\"true\">To get a\u00a0<\/span><strong><span data-preserver-spaces=\"true\">home equity loan<\/span><\/strong><span data-preserver-spaces=\"true\">, you must have equity in the home. You can get equity when you pay your mortgage down or right off the bat by making a down payment on the home.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">Your\u00a0<\/span><strong><span data-preserver-spaces=\"true\">home equity<\/span><\/strong><span data-preserver-spaces=\"true\">\u00a0is what\u2019s left over from your home\u2019s current value after accounting for any outstanding\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.privamortgage.com\/mortgage\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">mortgage loans<\/span><\/a><span data-preserver-spaces=\"true\">. If you have over 20% equity in the home, you may be able to borrow money from the equity with a home equity loan.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">To get a\u00a0<\/span><strong><span data-preserver-spaces=\"true\">home equity loan<\/span><\/strong><span data-preserver-spaces=\"true\">, you\u2019ll complete an application and prove that you can afford the loan to the <a href=\"https:\/\/www.privamortgage.com\/\">mortgage lender<\/a>. Then, you\u2019ll provide paystubs, W-2s, and bank statements like you did with your first mortgage.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">If you qualify and have over 20% equity in the home, the lender will fund your loan, giving you the equity in one lump sum.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">You then make principal and interest payments on the loan with a fixed interest rate. This mortgage payment is separate from your first mortgage payment.<\/span><\/p>\n<h2><strong><span data-preserver-spaces=\"true\">How do I Calculate Home Equity?<\/span><\/strong><\/h2>\n<p><span data-preserver-spaces=\"true\">Before\u00a0<\/span><strong><span data-preserver-spaces=\"true\">applying for a home equity loan<\/span><\/strong><span data-preserver-spaces=\"true\">, determine how much equity you have in your home. Most lenders offer home equity loans up to 75% &#8211; 85% of your home\u2019s value, including your first mortgage.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">To see how much equity you have, take your home\u2019s current value and subtract any outstanding mortgage loans.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">For example, if your home is worth $350,000 and you have $200,000 in mortgage loans, you have $150,000 in equity. If a lender allows an LTV of up to 85%, you could have total outstanding loans of $297,500, leaving $97,500 to borrow in a home equity loan.<\/span><\/p>\n<h2><strong><span data-preserver-spaces=\"true\">How Does Borrowing from Home Equity Work?<\/span><\/strong><\/h2>\n<p><span data-preserver-spaces=\"true\">When you take out your home equity, you liquidate a portion of your equity. So, you\u2019ll always leave 15 \u2013 20% of your equity untouched. Lenders need that buffer in case you default on your loan.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">You\u2019ll take out a\u00a0<\/span><strong><span data-preserver-spaces=\"true\">second mortgage<\/span><\/strong><span data-preserver-spaces=\"true\">\u00a0on which you pay principal and interest for the entire term. You receive the funds three days after the closing and can do with them what you want.<\/span><\/p>\n<p><strong><span data-preserver-spaces=\"true\">How to Use Home Equity Loans<\/span><\/strong><\/p>\n<p><span data-preserver-spaces=\"true\">There\u2019s no right or wrong way to use\u00a0<\/span><strong><span data-preserver-spaces=\"true\">home equity loans<\/span><\/strong><span data-preserver-spaces=\"true\">. The most common way is to use the funds to renovate your home. Investing the money back in your home provides the best return on investment. It may also allow you to write off the interest paid on the portion used to improve your home.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">Other uses of home equity funds include:<\/span><\/p>\n<ul>\n<li><span data-preserver-spaces=\"true\">Debt consolidation<\/span><\/li>\n<li><span data-preserver-spaces=\"true\">Weddings<\/span><\/li>\n<li><span data-preserver-spaces=\"true\">Pay for college<\/span><\/li>\n<li><span data-preserver-spaces=\"true\">Save for an emergency fund<\/span><\/li>\n<li><span data-preserver-spaces=\"true\">Buy a vacation home<\/span><\/li>\n<\/ul>\n<h2><strong><span data-preserver-spaces=\"true\">How do I Qualify for a Home Equity Loan?<\/span><\/strong><\/h2>\n<p><span data-preserver-spaces=\"true\">To qualify for a\u00a0<\/span><strong><span data-preserver-spaces=\"true\">second mortgage on your home<\/span><\/strong><span data-preserver-spaces=\"true\">, you must prove the following factors:<\/span><\/p>\n<ul>\n<li><span data-preserver-spaces=\"true\">\u00b7 You have good credit \u2013 Lenders use your credit score to determine if you\u2019re a good risk. If you have bad credit, you are a higher risk of default. Most lenders require a credit score of at least 680 for a home equity loan.<\/span><\/li>\n<li><span data-preserver-spaces=\"true\">\u00b7 You have stable income \u2013 You must prove you have enough income to afford both mortgage payments (first and second), plus your other monthly obligations. Lenders prefer it if you\u2019ve been at the same job for two years.<\/span><\/li>\n<li><span data-preserver-spaces=\"true\">\u00b7 You have a low debt-to-income ratio \u2013 Lenders prefer a debt-to-income ratio of 43% or less. This means your total debts, including the home equity loan payment, are less than 43% of your monthly income.<\/span><\/li>\n<\/ul>\n<h2><strong><span data-preserver-spaces=\"true\">How to Find the Best Home Equity Loan<\/span><\/strong><\/h2>\n<p><span data-preserver-spaces=\"true\">Do the following to get the best rates and terms on your home equity loan.<\/span><\/p>\n<ul>\n<li><span data-preserver-spaces=\"true\">\u00b7 Improve your credit score<\/span><\/li>\n<\/ul>\n<p><span data-preserver-spaces=\"true\">Check your<\/span> <a class=\"editor-rtfLink\" href=\"http:\/\/www.annualcreditreport.com\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">credit history for free<\/span><\/a><span data-preserver-spaces=\"true\">. Fix any issues you find, such as late payments, collections, or credit lines with over 30% of the credit line outstanding. These changes will help your credit score and increase your chances of getting good terms.<\/span><\/p>\n<ul>\n<li><span data-preserver-spaces=\"true\">\u00b7 Pay down your debt<\/span><\/li>\n<\/ul>\n<p><span data-preserver-spaces=\"true\">Keep your DTI as low as possible. 43% is the maximum, but the fewer debts you have, the more likely you will get approved.<\/span><\/p>\n<ul>\n<li><span data-preserver-spaces=\"true\">\u00b7 Prove you\u2019re a good borrower<\/span><\/li>\n<\/ul>\n<p><span data-preserver-spaces=\"true\">Any way you can show the lender you are a good borrower helps. This is a great start if you have a solid payment history on your first mortgage. Also, if you have a large amount of equity in your home but only draw some of it, you\u2019ll have a good chance of approval.<\/span><\/p>\n<h2><strong><span data-preserver-spaces=\"true\">Summary<\/span><\/strong><\/h2>\n<p><span data-preserver-spaces=\"true\">A\u00a0<\/span><strong><span data-preserver-spaces=\"true\">home equity loan<\/span><\/strong><span data-preserver-spaces=\"true\"> has many uses and is easy to get when you have average qualifying factors. So, if you have equity in your home, tap into it with a home equity loan. Whether you need to do\u00a0<\/span><strong><span data-preserver-spaces=\"true\">home renovations<\/span><\/strong><span data-preserver-spaces=\"true\">, have debt to consolidate, or have other reasons to use the funds, a home equity loan can be an affordable way to get it.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>You have\u00a0home equity\u00a0if you\u2019ve paid off some of your mortgage. This means you have a stake in the home\u2019s value. If you sold the house today, you\u2019d receive the equity in cash. But while you live in the home, that money sits there as long as you own it. The good news is you can [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":114,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"nf_dc_page":"","om_disable_all_campaigns":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[14],"tags":[9,35,29,34,32,215,33,31,19,30],"class_list":["post-109","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mortgage","tag-cash-out-refinancing","tag-conventional-mortgages","tag-home-equity-loan","tag-home-equity-loan-alternatives","tag-home-improvements","tag-how-to-calculate-home-equity-loan","tag-low-rate-home-equity-loan","tag-mortgage","tag-priva-mortgage","tag-what-is-a-home-equity-loan"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.7 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Home Equity Loan \u2013 What is it and How Does it Work?<\/title>\n<meta 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