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Your Complete Guide to Home Equity Loans


Your Complete Guide to Home Equity Loans

Could you use some extra money in your life? Maybe you’re looking to build up your child’s college tuition fund. Maybe an unexpected illness landed you in the hospital and saddled you with debt, or you need emergency house repairs. Or perhaps you need to pay off a lot of credit card debt quickly or have another significant expense that you don’t have another way to pay for.

If you answered yes to any of these questions, you’re probably searching for “home equity loans near me,” and these loans may just be the solution for you.

Let’s take a look at what home equity loans are and explore some tips that will help you as you’re shopping for the best home equity loans.

What Is a Home Equity Loan?

Home equity loans work by allowing a borrower to use their home as collateral for a loan. The amount you qualify for depends on your home’s value, determined by a neutral third party — an appraiser. While this can be a quick and easy way for a borrower to qualify for a loan, the process does come with some risks, so it’s essential to fully understand how these loans work.

A Home Equity Loan Is a Second Mortgage

A home equity loan is, in fact, a second mortgage. To qualify for this type of loan, the home’s value needs to be more than the balance of the mortgage. Often (but not always), you’ll need to have fixed interest rates on a lump sum mortgage to qualify.

One of the major advantages of a home equity loan over a personal loan or credit card is that home equity interest rates tend to be lower.

How Do Home Equity Loans Work?

When you take out a home equity loan, you’re borrowing a fixed sum leveraged against the value of your home. A bank will act as the lender here, and a borrower must repay in monthly installments.

You’ll typically have a variable rate in a HELOC (home equity line of credit). HELOCs more closely resemble credit cards than personal loans. With a HELOC, you can borrow up to your approved amount by either using a card that’s connected to the HELOC account or writing a check.

HELOCs can also operate as interest only-loans. This means that making a minimum payment would only pay down your interest without actually touching the principal. This will typically end with a “balloon payment,” or one large payment for that loan at the end of its term. While a HELOC can be more convenient, the possibility of only paying down interest and having a balloon payment at the end of the term makes a home equity loan more favorable overall.

Not all banks offer home equity loans, but larger credit unions and financial institutions usually offer a variety of HELs and HELOCs. While a mortgage typically has little variety between investors, a home equity loan, by contrast, usually stays in the lender’s portfolio. This means that terms can vary from vendor to vendor.

Tips When Shopping for a Home Equity Loan

1. Get a Home Equity Loan for the Right Reason

Even if you qualify for a home equity loan, that doesn’t mean that you should get one without having a good reason. Since a home equity loan uses your house as collateral for the loan, there is a chance, however slight, that you could lose your home if you’re not able to make payments on the loan. With that said, it’s crucial to have a good reason for taking out the loan and the means to pay it back.

2. Work on Your Credit Score First

The two most important things to a lender are your existing debt and your current credit score. They’ll use these two data points when deciding whether to approve you for a new home equity loan. Along with the approval, these factors will also determine the interest rate once you’re approved.

If you’re looking to maximize your chances of approval for a lower interest rate, you should regularly check the credit reports for your account and be sure to dispute errors whenever possible. If you have any maxed-out cards or overdue bills, try to get those all current before you apply. Even minor improvements to your credit score can make a big difference, but being aware of where you stand is the best place to start.

3. Figure Out Your LTV

If your home has high equity, a potential lender will increase the amount you’re allowed to borrow proportionately. With that said, the best rates you’ll find will come from having a lower LTV, or loan-to-value ratio. Specifically, you’ll want to aim for a loan-to-value ratio of 80% or less. You can use a home equity loan calculator online as you navigate this process.

4. Be Sure to Compare

It can be easy to want to stick close to home and choose the bank where you’re already a customer. While your current bank or mortgage lender may offer home equity products, the interest rates they offer could be unfavorable compared to what you’d find with another lender.

When you’re shopping for home equity loans, it’s best to look at your current lender’s offer and compare it against the rates you can find at a few other lenders. You’ll want to know their fees and what the APR, or annual percentage rate, will be. Along with interest rates, you’ll want to see if the lenders offer any special promotions.

Greater Alliance Federal Credit Union Makes Home Equity Loans Simple

Greater Alliance Federal Credit Union has a dedicated and committed team of professionals whose primary goal is to serve our members and the wider community. For 85 years, we have believed that every homeowner should be able to benefit from home equity loans.

During our time in New Jersey, we have grown into an organization that community members trust and turn to for financial solutions to their problems. As we are a not-for-profit organization, all profits go back to our members. In fact, you’re more than a member when you open an account at Greater Alliance. You’re a part-owner of a financial alliance.

You can now access up to 100% of your home’s equity. With this loan, you can borrow up to 100% of your home’s value, minus your mortgage balance. That means you’ll have the resources you need…when you need them. Call Greater Alliance Federal Credit Union at 201-599-5500 to start a conversation about home equity loans today.