4 Things You Need to Know Before Taking Out a Home Equity Loan

While the value of your home rises and you pay off your mortgage, you’re building equity – but you’re also tying up all your money in one asset. AMF Equity Loans can help with that.

Tapping into your home equity is a way to reach your financial goals, finance your home improvement project, or pay off your student loans or other debt.

If you’re considering taking out a home equity loan or a home equity line of credit, here are four important facts you should know.

1.  You Need to Have Enough Home Equity to Qualify

If you are considering taking out a home equity loan, you need to have enough equity in your home to protect the bank and yourself.

For instance, if you take out a loan for $250,000 and your home is worth $250,000, you may have difficulty making enough profit to cover the loan on your house when you decide to sell it.

Whether you take out your first mortgage or tap into your home’s equity, the sale of your home will not be enough to cover the costs, especially if property values plummet or, worse – face foreclosure.

As a safeguard, most banks will not permit you to take out a home equity loan for more than 80% of your home’s value (the loan-to-value ratio). This applies to a home equity loan and a home equity line of credit.

2.  The Difference Between a Home Equity Loan and a HELOC

You can tap into your home equity in two ways – through a home equity loan or a home equity line of credit.

Home equity loans work more like a traditional mortgage– a lender lends you a certain amount of money, and you repay it over a set period of time. Usually, the designated period is between five and 15 years.

A home equity line of credit – or HELOC – enables you to borrow an amount of money and repay it over a period of time; however, you don’t need to withdraw the total amount. Instead, a HELOC works like a credit card. You can borrow variable amounts over a period of time. When the line of credit eventually expires, you must pay the amount back.

A HELOC is more flexible than a home equity loan because you can use your revolving line of credit when the need arises; however, the loan amount will be affected by the current interest rate.

3. You Should Shop Around

If you are considering taking out a home equity loan, you should get at least three different quotes from three different lenders.

There is a great deal of variability in interest rates, accessibility, terms, and price with home equity loans. You can use the quotes to negotiate and possibly get a better deal.

4. There Are Some Risks Involved

While taking out a home equity loan makes sense because it can help you repay debt and reach your financial goals, some risks are involved.

If your house loses value, you can find yourself in financial trouble if you’ve taken too much equity out of it. If you cannot repay your loan, you risk foreclosure – so make sure you can afford to make the monthly payments.


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