Your home is a valuable thing. It is the place where you entertain guests, keep yourself and your family safe and warm, a place where you spend leisure time, and possibly even a place where you work.
But from a purely financial perspective, your home is also very valuable: as an asset. It is valuable as an asset in two primary ways:
a. the equity you currently have in your home (which is calculated as the market value of the home minus the amount you owe on your first and/or second mortgage loans)
b. the equity you will someday have in your home once you pay it off completely
In this sense, you could say that your home is not only valuable today in real, dollars-and-cents terms, but that it also represents an important investment opportunity to you for your future.
Many people realize that “a” above – their current home equity – is something they can actually take advantage of now by borrowing against it via a home equity loan. This can be a smart way to, for example, reduce your monthly debt payments by using the cash from your home equity loan to pay down credit card debt.
Of course, before you take out this type of loan, it is wise to compare rates from different lenders in order to make sure you will qualify for the best rate.
In order to compare home equity rates effectively, it is important to understand the answers to these 5 frequently asked questions (FAQs):
1. What is a home equity loan?
A: Taking out a home equity loan is simply the act of receiving cash from a lender and then paying it back, with interest, over time. However, this type of loan is “secured” in the sense that the equity you have in your home is used as collateral. This means that, if you were to default on your loan one day in the future, your lender would “own” that portion of your home. Given that they are secured, home equity loans can be acquired for a much lower interest rate than, say, borrowing against a credit card.
2. What are the factors that can help me qualify for an equity loan?
A: First and foremost, your credit score is an important factor in qualifying. However, other factors include your current employment status and your income level.
3. When is the best time to apply for a loan?
A: You should apply any time you need cash for paying down other debt, making home improvements, etc. This type of loan is an excellent idea if you already have a lump sum in mind that you need. By contrast, if you would rather borrow a little at a time, a home equity line of credit might be a better choice for you. Ask your lender for your options.
4. Under what circumstances should I avoid taking out this type of loan?
A: You should not even apply for this type of loan if you owe more on your first and/or second mortgages than your home is worth. Without equity, such a loan is not even possible.
5. What is the best way to shop for a lender?
A: As with anything else, the more choices you have, the better. Apply to at least 3-4 lenders, in addition to your first mortgage holder. Compare rates and go with the best deal.
Take these answers to these 5 FAQs into account as you shop for the best home equity loan rates.