Trying to finance a large renovation on your house or putting an addition onto your home can be very tricky. Typically they cost a lot of money to fund or can take years to save up for. Home equity loans are one way to get money out of a home that you currently own to help give you extra funds towards renovations and additions. There are a few steps that you must take before getting a home equity loan and some equations to help you figure out how large of a loan you can receive. What are the steps to getting a home equity loan?
Firstly, a home equity loan is a secured loan and is considered to be a closed-ended loan. Also, a home equity loan is different than a home equity line of credit, which is an open-ended loan. Let me explain. A home equity line of credit is like a credit card. You can take out money from your house but the interest rate changes and the amount of money you can receive changes as well. A home equity loan is more like a debit card. You get a set amount of money on a loan and it’s given to you all at once. You can’t take out any more money than what you receive and the interest rate is typically fixed. Both are secured loans and both are also considered second mortgages on your house. In this article, we will specifically look at home equity loans rather than home equity lines of credit.
The very first thing that you want to do when applying for a home equity loan is to figure out your credit score. While there are many different paid online applications where you can see your credit score, you can also request your credit score for free once a year from your bank or the three different credit score “companies.” If you don’t have a great credit score, that’s ok, you can apply to different lender companies were the loan amount is based on your asset, not your credit. To increase your credit score, make sure that you are paying bills on time and try to get all of your credits and loans as close to zero as possible.
After you check your credit score, try to see how much money you would be able to get out of your home and compare it to how much the project is going to cost you. Typically a lender will give you no more than 85% of the value of your current home or the home that you are taking a mortgage out on. And yes, you can take a mortgage out on a home that you own but do not currently reside in. That value can fluctuate depending on your current income. A lender is thinking about all of these things when figuring out the loan value. Lenders would not want to give you a loan whose monthly payment is far more than you can handle financially or if your credit score reflects a lot of late payments or an excess of current credit already.
Besides looking at your credit score and the current value of your home lenders will also consider the Loan to Value Ratio of your home, also known as the LVR. The LVR is relatively easy to calculate but is yet another important step in the home equity loan process. The Loan to Value Ratio looks at home much your house in currently worth and what you still owe on your house. I’ll give you an example. Say that your house is worth $200,000. What would 85% of that value be? Your overall loan would be $170,000, or 85% of that value. That $170,000 is the total amount that you can owe on the house though. So, if you’ve currently paid $70,000 of your house, the most a lender will give you on a home equity loan is $100,000. That’s because you still owe money so they take the money that you own and subtract it from the 85% loan that they are overall willing to give you.
After figuring all of this information out it’s time to do some research. Start looking at all of the different banks and lenders that have a home equity loan to offer. Many financial institutions offer many different options, so finding one that works for you and your budget is essential. Make sure to look at average interest rates for your loan and find the lender that offers the lowest one. Make sure you read the fine print to see what their policies about repayment are and how their loans look as well. It’s incredibly important to know exactly what you’re getting into when applying for a loan. Call the banks or lenders that you feel will be the best fit and talk to a representative. Ask all the questions you have and make sure that you understand everything before committing to a single bank. Loans are expensive so you want to ensure that you’ve accepted the best offer possible for your situation.
There are a few final things that happen with a loan besides getting approved, going through the loan process, then finally receiving your money; there are also closing costs associated with your loan. That’s because this is considered a second mortgage, so most of the closing costs that you had on your first mortgage will happen yet again on this loan. Most people don’t realize that these fees do occur so make sure to calculate these into your final costs of a loan. If you’re not sure what these costs could be ask your lender to get an idea.
You don’t have to go broke trying to renovate or make additions to your home. There are many different loans that are possible for you, but a home equity loan might be the best option. You can get a large sum of money all at one time, under a secured loan to help you improve your house. Remember that the lenders will want to look at your income and the LVR of your current home. Research the best options for you and find out what approximate closing costs will be. If you’re looking to renovate your home, a home equity loan can be a great option for you.
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