At Amansad Financial, a lot of customers come to us with questions about home equity loans and 2nd Mortgages. We have helped people save money by paying credit card balances off by taking out loans against their home’s equity at a far lower rate of interest than what they were paying on those cards. Others have used some of the equity in their homes to help their kids start college without diving into the sort of debt that can leave them strapped for years out of graduation. Still others have either suffered a layoff or a medical problem well into middle age, and some of their equity has helped them make ends meet before they burn through their entire savings.
This article was put together to answer some of the most common questions that our customers have about home equity. You can always reach out to contact one of our home equity specialists, but take a look here to see if some of the answers are already here.
How do I take equity out of my house?
Three different vehicles exist to help you draw equity out of your house. One is the cash-out (equity take-out) refinance. This involves you enlarging your existing loan in order to pull out some cash. Here’s an example: let’s say you bought a house for $625,000 a dozen years ago. You’ve paid the balance of that mortgage down to $300,000 through some aggressive saving and some large down payments at the renewals, taking full advantage of pre-payment privileges and the appreciation of your home’s value thanks to changes in the market has driven your appraisal up to $800,000. You live in the heart of a big city, so lenders are likely to give you up to 80% LTV on the house. LTV means loan-to-value ratio, so if the value is $800,000, you can borrow up to a total of $640,000 against it. Given that you have a balance due of $300,000, you could take as much as $340,000 out in cash (less fees) to drive the loan up to 80% of the value. So, you would go to a lender (either your original one or a different one) and, upon approval, walk away with a check for $340,000, minus the fees, and have a new balance of as high as $640,000 on your loan.
Another way that you can take equity out of your house is a home equity loan. This is the form of a second loan that you take out on what you have already paid into your home through mortgage payments. If we go back to that earlier scenario, you could go to your original lender, or to another bank, and ask for a second loan for up to $340,000 (less fees). You would still owe that $640,000 on the house now, but you would have two payments each month. Both of these lenders could send you to foreclosure if you default on either loan, so make sure that you can afford the new payment in your budget.
A third way to take money out of your home is a home equity line of credit, or a HELOC. If you’re not sure exactly how much money you will need, then you can avoid the automatic payments that come with taking out a lump sum. When you gain approval for a HELOC, then it’s kind of like having a big credit card. You have the approval to take out a maximum amount over a period of time (known as the draw period). You only take out what you need, when you need it, and when the draw period ends, you start making principal and interest payments on what you took out. If you didn’t end up taking anything out, then you don’t owe a dime – the process of setting up the HELOC is free.
Common Questions & Reasons to Take Out a Home Equity Loan or a 2nd Mortgage:
Can I take equity out of my rental property?
In addition to your own primary residence, we can also help you find home equity loans for any other property that you own, including rental properties, whether it’s a single family home, a townhome or even a duplex. Some lenders will not offer equity loans on manufactured or mobile homes, though, so understanding which type of property you want to use for equity will be an important part of choosing from among our network.
I want to take out a home equity loan to pay off a mortgage. How do I compare different offers from lenders?
When you deal with a mortgage brokerage firm, you have access to different lenders with some unpublished special offers. If you approach a bank directly, though, then you should let your lending officer know that you are shopping the loan around with several different banks. Banks look for these loans to bring in revenue, so if you have an attractive lending profile and you mention that you are taking your business to multiple prospective lenders, your representative is more likely to bring you his best offer up front. Such metrics as the interest rate and the term of the loan have the most importance, as they will influence the cost of the credit over time – and the amount of time you have to pay the new loan back.
Should I take equity out of my house to buy a car? Should I take out a home equity loan for college?
People take out home equity loans for many different reasons. The key questions you should ask yourself are: Can you afford the new payments? Are you either taking care of a legitimate financial emergency or saving money in the process?
The first question is the most important one. If you’re already behind the eight-ball with your mortgage payments, then taking out a home equity loan might not be the right answer. After all, your payment on your home will go up. So you might have a big pile of cash now, but that will go away more quickly than you think, particularly if this new, larger payment is just eating a bigger hole in your financial picture.
If you can afford the payments, then you should think about whether the loan will save you money over time. If you’ve run up your credit cards at double-digit interest rates (or even higher), you can save a lot of money by taking out a home equity loan at a single-digit interest rate. Your interest rate for a college loan is likely to be higher than what you would spend on a home equity loan as well.
Should I take equity out of my house to invest? Can I take equity out of my house to start a business?
You can take equity out of your house to do whatever you want with it. Once again, you want to ask yourself those two questions from the previous question. Can you afford the payments each month? Will you profit from your decision? In the case of an investment scenario, whether it’s more real estate or starting a different type of business, you may not be looking at a comparison between interest rate scenarios, but instead a decision to start an enterprise that may or may not succeed.
This takes you back to the first question. While you may have the best business idea in the world, what is your plan if the business tanks? Can you afford the larger mortgage payment anyway? If not, you may want to consider taking some of the equity of your home out for this purpose
Can you take out an equity loan on land?
You will find fewer lenders that are willing to extend you an equity loan on land that has no improvements of any kind on it. The reason for this is that lenders feel that a borrower who runs into financial difficulty is more likely to walk away from a vacant lot than he is to walk away from the place where he lives. Because of this elevated level of risk, you can expect to pay a higher interest rate and face a lower LTV ratio.
How much equity can I take out on a property?
Lenders will generally advance up to 80% of the appraised value of your home. Like we explained earlier, this amount would be the sum of your existing balance owed and the new loan that you would take out. Example, if your appraised value is $1,000,000, and you lived in a major city (and had solid credit), you could take out a loan that would push your new total owed to $800,000. If your current balance owed is $500,000, then you could qualify for $300,000 more, less fees.
Can I take equity out of my home with bad credit?
Credit is certainly an important factor in any lending decision. However, in the case of a home equity loan, HELOC or cash out refinance, you have likely built a track record of making your mortgage payments on time. Also, you have the house as collateral. However, your maximum LTV ratio (depending on location) may be modified than it would be if you had terrific credit, and you will likely face a higher interest rate than you would have otherwise. However, don’t assume that just because your credit has slipped a bit you won’t be able to get a home equity loan.
If your credit or income is doesn’t meet bank requirements, and private lending is required urban markets will generally advance up to 75%, however some will actually provide more than the banks… up to 85% of the property value is select markets, and up to 65-70% is non-urban markets.
What documentation is necessary for a home equity mortgage loan
Expect the lender to ask for satisfactory income verification such as job letters, and recent paystubs if you’re an employee. If you are self-employed and/or own rental properties, you will still have to provide proof of your income by way of 2-year tax returns and corresponding personal notice of assessments. Information about other assets such as savings and investment accounts may also be necessary. If the equity loan being requested is from a private lender, not as much documentation may be required if the LTV is below 65%. Every situation however is a case-by-case basis.
How does the lending decision process take place?
Once you provide your information to your lending representative, the brokerage or bank goes over the whole package – credit history, property value, income verification. These three factors determine whether or not you gain approval, and what your interest rate and approved LTV ratio will be. Banks generally take longer to provide an approval, however with Amansad Financial, we can generally issue a conditional commitment within 1-2 days upon receipt of application and some initial key documents.
Still have questions? Talk to Amansad Financial today. We have helped many customers get the loan they need. A home equity loan might be the best decision for you – but it might not. So reach out to us, and we will discuss your present situation, and then we will recommend the best option for you and your family.