When it comes to borrowing, you have a lot of options to choose from. There are various loans and credit options that may work for your needs. When it comes to borrowing, there are a few things that can be helpful. A good credit score, healthy income, and low debt can help you qualify for financing with lower interest rates. Owning your home can also be beneficial if you are looking to borrow. One way that your home can help is if you plan on taking out a home equity loan. These loans allow you to use your home's equity to your advantage. Here are three things you should know.
How They Work
The first thing that you should do if you are considering a home equity loan is familiarize yourself with these types of loans. Home equity loans are essentially second mortgages. You can use the loan to pay for nearly anything. Many homeowners use them to pay for college expenses, medical bills, or home renovations. You are able to borrow a set amount determined by how much equity you have in your home. Just like with a mortgage, you pay a set amount each month for an agreed upon term. Home equity loans are secured, meaning your home is used as collateral.
While a home equity loan may seem like the right option, even if you own your home, you may not meet the requirements lenders have in place. Typically you will need a credit score of at least 620 along with a debt-to-income ratio no greater than 43 percent in order to qualify for one of these loans. The amount you can borrow also varies depending on how much equity you have in your home. Most lenders require that you have a minimum of 20 percent equity in your home.
Interest Rates and Other Fees
It's also important to be aware of interest rates and other fees when taking out a home equity loan. Often home equity loans offer some of the lowest interest rates available since they are secured loans. However, it's important to take a look at all of your options before making a decision. Other fees to consider include home appraisal fees, closing costs, and even loan origination fees. Closing costs alone typically range anywhere from 2 to 5 percent of the total cost of the loan.
If you are considering a home equity loan, there are a few things that you should keep in mind. First, it's important to be familiar with how these types of loans work and determine whether or not this is the right loan for your needs. Requirements can vary from lender to lender, but you will typically need a good credit score and enough equity in your home. It's also important to factor in interest rates and other fees when making your decision.