Should You Consider a Home Equity Loan?

A home equity loan, also known as a second mortgage, is a type of loan that allows homeowners to borrow money by using their home’s equity as collateral. Home equity refers to the portion of the property’s value that the homeowner owns outright, which is the difference between the property’s market value and any outstanding mortgage debt.

Happy Home

Here’s how a home equity loan typically works:

  • Determining the available equity: The first step is to assess the amount of equity you have in your home. This is done by subtracting any outstanding mortgage balance from the current market value of your property. For example, if your home is worth $400,000 and you still owe $200,000 on your mortgage, your available equity would be $200,000.
  • Loan application: Once you have an idea of the available equity, you can apply for a home equity loan with a lender of your choice. The lender will evaluate your credit history, income, and the value of your home to determine if you qualify for the loan.
  • Loan approval and terms: If your loan application is approved, the lender will specify the loan amount, interest rate, repayment period, and any other terms and conditions. Home equity loans typically have fixed interest rates and are repaid over a set period, usually 5 to 30 years.
  • Disbursement of funds: Once you accept the loan offer, the lender will disburse the funds to you either as a lump sum or in multiple installments, depending on the terms of the loan. You can then use the money for various purposes, such as home improvements, debt consolidation, education expenses, or other financial needs.
  • Repayment: After receiving the funds, you’ll need to make regular monthly payments to repay the loan. These payments typically include both principal and interest and are spread out over the agreed-upon repayment period. It’s important to make timely payments to avoid late fees and potential default on the loan.
  • Consequences of default: Since your home is used as collateral for the loan, failure to repay the home equity loan can result in foreclosure, where the lender can take ownership of your property to recover the outstanding debt. It’s crucial to carefully consider your ability to repay the loan before borrowing against your home’s equity.
  • Interest and tax benefits: Home equity loans often come with tax advantages, as the interest paid on the loan may be tax-deductible in certain situations. However, tax laws can vary, so it’s advisable to consult with a tax professional for specific advice regarding your situation.

Remember, home equity loans involve financial risk, and it’s important to understand the terms, repayment obligations, and potential consequences before proceeding. Consider consulting with a financial advisor or mortgage specialist to assess whether a home equity loan is the right option for your needs.

Call Us Today!


The 5 Biggest Things That Affect Your Mortgage Rates

One of the most common conversations we have with clients is why their mortgage rate is different from the rates they see advertised on TV.  Mortgage rates are affected by several things which is why you probably have a different loan rate than your friends and family. The mortgage rates you see advertised on TV are rates for what lenders consider a perfect loan scenario. Most advertised rates apply to less than 5% of California mortgage loans.

In this article, we share the top 5 factors that affect the interest rate on your mortgage loan.

The 1st factor is beyond your control or your lender’s control. Factors 2-5 are considered varying levels of risk to lenders. Your mortgage interest rate is calculated in part on where you rank on these 5 factors.

First, General Market Rates.  The baseline mortgage rates are based on current interest rates set by our financial markets.  These rates fluctuate based on general economic health, inflation, the jobless rate, imports, exports, etc…

Second, Credit Scores. The lower your credit score is, the higher your mortgage loan rate.  This is because lenders consider lower credit score borrowers more risky than a borrower with high credit scores.

Third, Debt vs Income. If you earn a good income but you also owe a lot of money to personal loans, credit cards, auto loans or other obligations your mortgage interest rate will be higher than someone who does not have a lot of monthly debt payments. Lenders refer to this as your Debt to Income Ratio (DTI).  

Fourth, Loan to Value.  If your home is worth $500,000 and your mortgage loan is $400,000 then your Loan to Value (LTV) is 80%.  Someone with a 70% LTV will get a lower mortgage interest rate than someone with 80% LTV. This is why when home values are high many homeowners will refinance their home.  The higher loan value gives them more borrowing power as well as a more attractive interest rate.

Fifth, Loan Size. Every county in the U.S. has a loan limit established by Federal Guidelines.  You can still borrow more money than this loan limit. However, if your mortgage loan is equal to or less than this limit, you will get a lower mortgage interest rate. These county limits change but your mortgage lender can tell you what the current limit is for your county.

Call Us Today!