Home Equity Loan And HELOC
If you have sufficient equity in your home, you may be able to qualify for a home equity loan and HELOC. Most home buyers put very little money down on a home purchase so the chances are very slim that you will be able to get a home equity loan and HELOC right after you close on your home. HELOC stands for a Home Equity Line of Credit and is different than a home equity loan in a sense that you get a home equity line of credit where you can use it and pay it off whenever you want whereas a home equity loan, the bank will give you a lump of cash at once. A home equity loan works in a different way than a Home Equity Line of Credit in a sense that once you pay off the balance of the home equity loan, you cannot reuse it like a line of credit.
If you have owned your home for some time, check to see if your home have appreciated in value. Many home values have increased significantly over the past few years, especially in the state of California, Florida, and Illinois and many homeowners will be surprised at their current values of their homes. Some counties in California, Florida, and Illinois has seen property values increase double digits.
Qualifying For A Home Equity Loan
A lender will fund a home equity loan to a homeowner who has sufficient equity in their home. Home equity loan lenders will based their lending decision on the credit and financial profile of their borrower and the equity the borrower has in his or her home. Home equity loans and home equity lines of credit is known as second mortgages which means the second mortgage lender stands in a second lien position to the property behind the first mortgage lender. By being on a second lien position, the second mortgage lien holder stand to hold a greater risk than the first mortgage lien holder. In the event if the homeowner defaults on his or her first mortgage, the second mortgage lien holder stands a greater risk of not getting paid on their collateral if there is not enough money to pay off the first mortgage lien holder. The second mortgage lien holder can pay off the first mortgage lien holder and aquire the property, but this is not often the case because there is normally not enough funds from a foreclosure even to pay off the first mortgage lien holder in full.
How Much Can You Borrow On A Home Equity Loan And HELOC
The maximum amount you can borrow on a Home Equity Loan and HELOC will depend on how much equity you have on your home and that depends on the loan to value of your property. Every second mortgage lender have their own standards and second mortgage lending guidelines. Some second mortgage lenders may cap the debt to income ratios at 75%, while others may cap it at 80% loan to value. Still other second mortgage lenders will go to 85% to 90% loan to value on a Home Equity Loan and HELOC. There are second mortgage lenders who will lend up to 100% loan to value on a Home Equity Line of Credit for homeowners with perfect credit.
Terms on a Home Equity Loan and HELOC is normally 10 years to 15 years. Many times, the second mortgage lender can offer interest only payments on second mortgages.
Home Equity Line Of Credit
Home Equity Line of Credit is a second mortgage that is in a form of revolving credit, somewhat like a credit card. The second mortgage lender will extend the maximum available credit that you qualify for based on your credit and loan to value. You can then use and pay down the Home Equity Line of Credit anytime during a specified time, which in most cases is five to ten years. After the specified period, draw period has expired, the Home Equity Line of Credit will convert to a second mortgage and you start paying on the principal and interest of the HELOC. Repayment periods can vary from lender to lender but the range of the repayment period is usually 15 to 20 years on a HELOC.
Second Mortgage Qualifying Factors
Three factors that come into play in qualifying for a home equity loan and HELOC. Credit, debt to income ratios, and loan to value. Since second mortgage lenders carry a greater risk, second mortgage lenders will want a strong credit borrower. Most home equity loan and HELOC lenders require a minimum of a 700 FICO credit score. Debt to income ratios can not normally exceed 45% DTI including the home equity loan payments. Loan to value will vary between 75% to 100% depending on the second mortgage lender.