A home equity loan provides an opportunity to borrow money using the home as collateral. Similar to a home equity credit, it functions with the home as security to back the credit. Home equity loans are relatively cheaper to access in terms of the cost of borrowing as compared to other loans. This makes them a good choice for debt consolidation, financing home renovations, paying for tuition, or dealing with large medical expenses. If you are planning to get a home equity loan, here are the following steps on how to apply for a home equity loan.
Determine If You Qualify There are certain requirements that one has to meet before applying for a grant and they include the following. Most lenders provide home equity loans only if the borrower has a large amount of equity in the house. Your home equity would be obtained by lessening your current home mortgage balance and the estimated market price of your home. In general, a loantovalue ratio below 85 percent is expected from the borrowers by the lenders. This implies that the total of the primary mortgage and the home equity loan should not be more than eighty five percent of the value of your home.
Your credit score is yet another requirement that is accorded a lot of importance. The minimum credit score that most lenders will accept is usually in the region of mid600s. If the credit score is lower, it will be advisable to spend some time working on it before applying for the loans. You will also require adequate income to service the extra mortgage costs resulting from the loan.
Compare Lenders The next step is to approach several other lending institutions in order to compare the available offers. Every home equity loan provider has its own procedures, interest rates, and requirements. When you compare all available offers, you can select the best loan product in terms of available rates. Some of the aspects to consider when comparing what a lender is offering include interest rates, fees, loan limits, and flexibility of repayment. It also assists in establishing how much cash one can borrow based on the current amount of home equity from different lenders through the provision of customized quotes.
Home equity loans come in two main varieties: fixed-rate and adjustable-rate. There are two basic forms of home equity loans, which are home equity line of credit (HELOC), and home equity loans. HELOC establishes a revolving credit line based on home equity and payments are made on the borrowed amount and Home equity loans on the other hand offer a one time credit without renewal and payments have to be made in equal installments.
HELOC – This allows you to borrow a sum of money, up to the credit limit and pay back the amount together with interest within a ‘draw period’. It works similarly to a credit card where you can withdraw money whenever you want and pay it back at your convenience. HELOC rates on the other hand may begin lower but vary since they are characterized by variable rate of interest.
Home Equity Loan – This option offers a lump sum of cash where you have the right to borrow against your home’s equity. This type of loan will provide you the total approved loan amount and will pay the purchase price in full and then pay fixed installments on the agreed period of time. Home equity loans do have fixed rates, which means your monthly payments will remain constant.
It is advisable to determine which of the financing has been most suitable for your needs and the intended usage of the loans before going for a particular lender or loan program.
Gather Required Documents It is wise to ensure that you bring documents that can support your eligibility when applying for the Scholarship. This list may include
Identification – Social security number, driver’s license, passport Recent pay stubs This includes W2s and tax returns for the last couple of years. Property ownership documents – Deed, the most recent mortgage statement Home value estimate Appraisal, comps analysis Bank statements Outstanding debt balances Credit history report
Many of these documents help in expediting the underwriting process when readily available. This includes any form of assets, source of income and value of property documents in order to show that such an individual is capable of handling more of additional debt. It also reveals the current position of equity stakes in your home.
Complete Home Equity Loan Application The fifth step therefore involves making and submitting a home equity loan completion form with your documents. Today most of the lenders have short and easy to fill online application forms that do not take much time. Be prepared to provide both personal and financial information, covering details like:Be prepared to provide both personal and financial information, covering details like:
The purpose for which you want to use the loan Requested loan amount Monthly income and expenses Employment details Money (cash balances in the bank, stocks, bonds etc) Current and anticipated debts Credit history Address of the property, its estimate market value and any existing encumbrances such as mortgage.
Make sure not to rush through the whole process and instead spend considerable time on each section, no matter how long it may take. These mistakes are costly and can hurt or even stop your application from proceeding during underwriting.
Check Your Rate And Term Getting pre-approved for a home equity loan takes a few days, after which the lender will provide you with specific details of a home equity loan offer. This has important information such as
Interest rates Total charges (origination charges, rebates points, processing fees) Exact loan size Loan repayment period (30 years, 20 years, 15 years, etc) Payment amount Start date
Read through all the terms given by the contractor very keenly before agreeing to the offer. Compute the total interest charges if the specified rate and time period apply to the loan amount. Do not forget to make sure that you understand the tax implications as well. If there are any questions or concerns regarding their terms and conditions, talk to the loan officer before going any further.
Sign Documents At Closing If the borrower is satisfied with the loan offer, the next steps are the loan closure stage and formal approval. This is the stage where you go through all the legal documents associated with home equity loan. This consists of the security instrument under which your home is pledged, and the contract note with payment terms. In no case should you sign any papers without first consulting their contents for your best protection.
Receive Your Funds As soon as the necessary paperwork is signed and forwarded to your lender, you can get cash within a couple of days in most cases. Using a wire transfer or check is common for receiving your tax-free payout. You can then utilize the lump sum for the intended purpose, be it paying off debts or making home improvements. Ensure that future monthly payments are serviced on time in accordance with the provisions of the loan agreement.
Closing costs you should be prepared for The last word of caution when taking out home equity loan is closing cost which includes the cost of appraisal, attorney and application. They usually cost between 2% and 5% of the total loan amount you are seeking to borrow. This way, costs are rolled into your loan amount and it maintains payment ability reasonable if later is needed. Just have a higher total debt amount when more exposed to interest rates in the future.
Perhaps this brief overview of the 10 steps help you select the best home equity loan for you. Here are some of the tips when researching lenders to obtaining your tax-free payout wisely: Adopting a systematic way ensures that your loan process makes your financial position even better despite the new obligations.
