How do lenders view Home Equity loans?
Lenders view home equity loans as a relatively safe loan to make. The loan is ‘secured’ with the borrower’s home as collateral. If the borrower fails to repay, the bank can take the property, sell it and recover any unpaid funds thru foreclosure. Additionally, borrowers tend to prioritize these loans over other loans because they don’t want to lose their homes – they may make the house payment before the credit card payment.
Are there any potential negative impacts of Home Equity solutions?
Home Equity solutions don’t cost much to establish, have low annual fees, may be tax deductible and provide easy access to cash. What could go wrong? Having extra cash available and the potential to live beyond one’s means, requires discipline to properly manage household finances. Just like any financial obligation, it must fit into a budget that balances with income.
What documentation is required to get approved for a Home Equity Loan?
Home Equity solutions tend to be very similar to primary mortgages when it comes to the application and loan approval process. Key documents may include:
- Formal application (this can be completed online)
- Current mortgage statement
- Homeowners insurance declaration page
- Property tax bill
- Proof of income (W2s, tax returns)
- Paystubs for the past month
- Copy of driver’s license
These requirements can vary and some may be able to be retrieved as part of the online application process.
How is the amount of equity in a home calculated?
The amount of home equity is calculated by subtracting the amount owed on the home (current mortgage amount) from the home’s value. The value is ultimately determined by a formal appraisal but it can be estimated to get a rough idea of the home equity. For a home with an estimated value of $300,000 and a current mortgage balance of $210,000, the equity in the home is $90,000.
How much money can a borrower get from a Home Equity Loan?
First, the amount of equity in the home needs to be calculated. For a home with an estimated value of $300,000 and a current mortgage balance of $210,000, the equity in the home is $90,000. Next, we need to introduce the concept of loan-to-value or LTV. LTV is the total home loan obligation divided by the value of the home reflected in a percentage. From the previous example, the LTV would be $210,000 divided by $300,000 or 70%. When considering a home equity solution, most lenders will loan up to 80% LTV – meaning that the current mortgage balance plus the home equity loan cannot exceed 80% of the home value. Therefore in our example, the home equity loan amount could be $30,000 (10%). Here’s the equation: ($210,000 + $30,000)/$300,000 = 80%.
What does a second mortgage mean?
Home equity loans are known as second mortgages. This means that they are second in line to the primary home loan when it comes to lien status. In the event of a foreclosure, the primary home loan gets the sale proceeds to cover their loan amount and any remaining funds go to the second mortgage – the home equity loan.