Find out how much equity you need for a home equity loan and compare lenders that offer loans with low equity requirements.
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How home equity loans work
A home equity loan is a lump sum of cash that’s essentially borrowed against the equity of a home. Equity is the difference between the appraised value of your house and the amount you still owe on your mortgage.
For example, let’s say your house is worth $250,000 and you owe $150,000 on your mortgage. That means you have $100,000 in home equity. If you needed $25,000, you could borrow that amount through a home equity loan.
Home equity loans are attractive because they usually have lower interest rates than other types of loans. But before moving forward with one, it’s important to understand how they work and consider the potential risks.
How much equity you need for a home equity loan
The amount of equity you need for a home equity loan depends on the lender you use and the type of loan you’re seeking. Some lenders may allow you to borrow up to 85% of your home’s equity, while others may limit you to 70%. For example, if your home is worth $250,000 and your mortgage balance is $150,000, you have $100,000 in equity — 50% loan-to-value (LTV). If you’re seeking a $50,000 home equity loan, the most you can borrow is $25,000 — 50% LTV. A higher LTV ratio means more risk for the lender because the amount being borrowed is closer to the value of the home. To offset this risk, borrowers with higher LTVs typically need to pay for private mortgage insurance (PMI).
How to calculate your home equity
Your home equity is the difference between your home’s appraised value and your current mortgage balance. To calculate your home equity, simply subtract your mortgage balance from your home’s appraised value. For example, if your home is appraised at $300,000 and you have a $200,000 mortgage balance, you have $100,000 in home equity.
How to get a home equity loan
A home equity loan is a popular way to finance home improvements and major expenses. You can usually borrow up to 85% of your home’s value, minus the balance of your mortgage. So if your home is worth $300,000 and you owe $100,000 on your mortgage, you could potentially borrow up to $170,000 with a home equity loan.
To qualify for a home equity loan, you’ll need to have equity in your home — typically at least 20% of the appraised value or the selling price, whichever is less. You’ll also need a good credit score to qualify for a competitive interest rate. And because it’s a second mortgage, you’ll pay closing costs similar to what you paid when you got your first mortgage.
If you’re not sure whether a home equity loan is right for you or how much equity you need to qualify, talk to a lender who can help guide you through the process.
Pros and cons of home equity loans
A home equity loan is a type of second mortgage. Your first mortgage is the one you used to purchase your home, but you can place additional loans against the property as well as long as you have both the equity in the home and approval from your lender. Home equity loans are sometimes called “second mortgages” because they are subordinate to the original mortgage. Home equity loans are different from a home equity line of credit (HELOC), which allows you to borrow or draw money multiple times from an available maximum amount.
A home equity loan or HELOC can be a good way to tap into your home equity to finance a large project or make a major purchase. But like all loans, there are risks involved. Make sure you understand how these types of loans work before you sign on the dotted line.
-May have lower interest rates than other types of loans
-The interest may be tax deductible*
-May offer fixed interest rates
-Takes away equity in your home that could be used in the future, such as for financing college tuition or funding a business venture
-If housing prices drop, you could end up owing more on your mortgage than what your house is worth (this is known as being “underwater” on your mortgage)
-Closing costs and fees may be charged