Buying a house in the United States, investing in financial management
Home equity loans and home equity lines of credit (HELOC) are ways for homeowners to monetize their accumulated home equity. However, generally, only a portion of your home equity can be borrowed, so learn how to calculate your home equity before choosing a home equity loan.
How is home equity calculated?
Home equity is the difference between the market value of the home and the homeowner’s outstanding loan. Therefore, homeowners need to first check the market price of the house, which can be found through Zillow’s Zestimate or Redfin’s Estimate. Both of these methods are free and are estimated by algorithms combined with public information on the market.
[For example] Suppose a homeowner finds that the house price is $300,000, then he will look at the most recent mortgage statement (mortgage statement) to see how much he has an outstanding mortgage.
Assuming there is $180,000 left on the mortgage, the owner’s home equity is $120,000 ($300,000 – $180,000 = $120,000)
How is the loan-to-value ratio calculated?
The loan-to-value ratio is the loan-to-value ratio, referred to as the LTV ratio. The loan company uses the LTV ratio to judge the risk of lending to the lender. The LTV ratio is calculated by dividing the outstanding home loan by the current home price.
Based on the example above, this homeowner has an LTV ratio of 60% ($180,000 / $300,000 = 0.60)
The higher the LTV ratio, the higher the lending risk for the lending company. General loan companies require an LTV below 85%, so the LTV of the homeowner in the example is eligible for a home equity loan.
How much can a home equity loan be borrowed?
Different loan companies have different loan amounts and also depend on the lender’s credit score and income. Generally speaking, the loan company’s maximum loan amount is 75% to 90% of the home’s available equity.
Based on the example above, assuming the lender allows that homeowner to borrow up to 80% of the home’s equity, the homeowner could end up with a loan of $60,000.
$300,000 [Home Price] x 0.80 [Maximum Loan Amount Ratio]) – $180,000 [Loan Outstanding] = $60,000
How do I apply for a home equity loan?
After you have initially figured out how much you can borrow from your home equity, the last step is to apply for a home equity loan. There are two loan programs on the market today: Home equity loan and HELOC.
Content: Similar to a credit card, you will get a credit limit after you apply. Usually, this limit lasts for 10 years. During these 10 years, you can use this limit according to your needs, and you can repay as much as you owe. After the money is paid, the limit will be restored to the original. However, once you reach the end of your line of credit, you will no longer be able to use the money each month, after which you will need to make monthly repayments.
Amount: Banks typically limit the amount you can borrow to no more than 85% of the current home value, minus the loan. Taking a house worth 400,000 yuan and a mortgage balance of 300,000 yuan as an example, the maximum HELOC amount is 40,000 yuan (400,000*85% – 300,000).
Interest Rate: HELOC’s interest rate is usually a floating rate.
1. Pay part of the interest: pay as much interest as you spend, without paying interest on the entire net worth
2. More flexible interest payment: During the withdrawal period, interest-only loans can be provided
1. Rising interest rates: Since it is not a fixed interest rate, once the interest rate rises, more money needs to be paid
2. Spending without restraint: Since HELOCs are more flexible, which means lack of planning, the lender may spend too much in the short term, and not pay a huge amount of repayment (principal + interest) during the repayment period.
Home equity loan
Content: The borrower can get the full loan amount at one time, and then repay a certain amount (principal + interest) every month.
Amount: Banks typically limit the amount you can borrow to no more than 85% of your current home equity. Taking a house worth 400,000 yuan, a mortgage balance of 300,000 yuan, and a home equity value of 100,000 yuan as an example, the maximum amount of a Home Equity Loan is 85,000 yuan (100,000*85%).
Interest Rate: Home equity loan interest rates are usually fixed rates.
1. Good loan interest rate and tenor: The given interest rate and tenor are better than personal loans or unsecured loans (such as credit cards), and the monthly repayment amount is the same.
2. You can cash out more money: Compared to unsecured loans (such as credit cards), home equity loans can be borrowed for larger amounts of cash. And if the money is used for home repairs, it can also deduct the interest.
3. Flexible use of funds: It can be used to pay tuition fees, start a business, renovate a property, or pay for emergency expenses, etc.
1. There is a risk of the property being confiscated: If the borrower’s financial situation suddenly changes significantly, resulting in the inability to repay the loan, the property may be lost.
2. Risk of house depreciation
Neither type of loan has restrictions on how the funds can be used, such as debt consolidation, education expenses, emergency funds, and more. The more popular way to use the funds is to renovate the house because the refurbishment can further increase the house price, and it is more advantageous to sell the house in the end. It is worth mentioning that if the home equity loan is used for a home renovation project, the interest is tax-deductible.
The main risk with a home equity loan is that you take your house as collateral, so if you don’t pay the loan, you risk losing it. There’s also the risk that if home prices fall, the homeowner’s loan amount could exceed the value of the home.
Therefore, the loan must be based on personal needs, not follow the trend. But if money is needed, a home equity loan is a very good source of funding.
Looking to invest with Home Equity Loan? Find the best deal with online analysis tools
Many of Home Equity Loan’s terms and fees are set by the lender, so it’s best to research these details before you enter into any agreement. Some fees you can even negotiate openly. The free analysis tool above can select Home Equity Loan companies in the state of residence to recommend. The interest rate and handling fee are given by each company will vary depending on the amount of the loan and the loan method. If you want to save some money here, you will never lose money by shopping around.