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Thomas Barwick/Getty Images October 20, 2022 Jerry Brown is a contributing writer for Bankrate. Jerry writes about home equity, personal loans, auto loans and debt management. Suzanne De Vita is the mortgage editor for Bankrate, focusing on mortgage and real estate topics for homebuyers, homeowners, investors and renters. Bankrate logo The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here's an explanation for how we make money. Bankrate logo The Bankrate promise
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our home equity reporters and editors focus on the points consumers care about most — the latest rates, the best lenders, different types of home equity options and more — so you can feel confident when you make decisions as a borrower or homeowner. Bankrate logo Editorial integrity
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You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. Home equity loans allow homeowners to borrow against the equity they’ve built in their house. Funded in a lump sum, this type of borrowing offers several advantages versus other types of loans. What is a home equity loan
A home equity loan is a type of with a fixed rate, secured by the equity in your home. It offers a fixed amount of funds, so it’s best for borrowers who know exactly how much they need to borrow. Because your home is the collateral for the loan, home equity lenders typically charge compared to the rates on and . Keep in mind, however, that the interest rate you receive on a home equity loan, personal loan or credit card will vary depending on your lender, credit score, income and other factors. View home equity rates
How a home equity loan works
When you take out a home equity loan, the lender approves you for a loan amount based on the percentage of equity you have in your home. Some lenders might require you to pay closing costs to get a home equity loan. Once your funds are issued, you’ll repay the loan in fixed monthly installments that include principal and interest payments. Although terms vary, home equity loans can be repaid over a period as long as 30 years. Since the loan is secured by your home, the property is at risk for foreclosure if you can’t repay what you borrowed. This can cause serious damage to your credit score, making it harder for you to qualify for future loans. If you use a home equity loan to make home improvements, the interest you pay on it might be . According to the IRS, you can deduct interest on a home equity loan that is used to “buy, build or substantially improve” the property. Home equity loan requirements
Lenders have different . Some typical requirements include: Credit score: At least in the mid-600s Home equity: At least 15 percent to 20 percent Employment and income: At least two years of employment history and pay stubs from the past 30 days Debt-to-income (DTI) ratio: No more than 43 percent : No more than 85 percent Home equity loan pros and cons
Pros
Attractive interest rates: Compared to other forms of financing like a credit card or personal loan, home equity loans have lower rates. This is because home equity loans are a type of secured debt, meaning it’s relatively safer for the lender to offer. Here’s more on . Fixed monthly payments: Home equity loans offer the stability of a fixed interest rate and a fixed monthly payment. This might make it easier for you to budget or save. This also eliminates the possibility of getting hit with a higher payment with a variable-rate product, like a credit card or . Cons
Home on the line: Your home is the collateral for a home equity loan, so if you can’t repay it, your lender could foreclose. No flexibility: If you’re not sure how much money you need to borrow (you’re paying college tuition, say), a home equity loan might not be the best choice. That’s because home equity loans only offer a fixed lump sum, so you run the risk of borrowing too little. On the flip side, you might borrow too much, which you’ll still need to repay with interest. HELOCs vs home equity loans
A home equity loan isn’t the only option for borrowing against your equity. You could alternatively obtain a home equity line of credit, or HELOC. While a HELOC is also secured by the equity in your home and has similar requirements, it . With a HELOC, you can borrow money on an as-needed basis, up to a set limit, typically over a 10-year draw period. During that time, you’ll make interest-only payments on what you borrow. When the draw period ends, you’ll repay what you borrowed and any interest, usually over a repayment term of up to 20 years. Unlike home equity loans, HELOCs have variable interest rates. Though tend to be lower than home equity loan rates, your monthly payments could increase if interest rates increase. Home equity loan FAQ
Are there closing costs on a home equity loan
Some home equity lenders, but not all, charge on home equity loans. These fees might be lower than the costs you paid when you closed on your first mortgage.
Does taking out a home equity loan hurt your credit
Taking on any form of debt, including a home equity loan, has an impact on your credit score. After you close on a home equity loan, your score might decrease temporarily. Over time, as you continue to make payments on the loan, you might see your score improve, as well.
How do you calculate home equity
Your level of equity is your home’s current value minus your outstanding mortgage balance. To calculate the percentage of equity you have in your home, divide your outstanding mortgage balance by the estimated value of your home. If you need help estimating the value of your home or calculating your equity, you can use a . SHARE: Jerry Brown is a contributing writer for Bankrate. Jerry writes about home equity, personal loans, auto loans and debt management. Suzanne De Vita is the mortgage editor for Bankrate, focusing on mortgage and real estate topics for homebuyers, homeowners, investors and renters.