What is a Home Equity Loan?

A home equity loan is a type of loan in which you use the equity in your home as collateral. These loans are sometimes called second mortgages. Many homeowners use a home equity loan to do renovations on their home, or to make large purchases like new appliances.

Home Equity Loan Requirements

You must have enough equity in your home to serve as collateral for a home equity loan. You can calculate the equity in your home by subtracting the total outstanding balances of all mortgages on the property from the current market value of your home.

What is home equity? Equity is the amount of money you would get from selling your house after paying off the balance of your mortgage loan.

Most lenders allow you to borrow up to 85% of the total value of your property, so they’ll add the amount of financing you’re seeking to your current outstanding mortgage balances to determine the amount of equity that will remain after financing. This is a desirable ratio, but there are some lenders that will allow you to borrow up to 90% or 100% of your property’s value.

Additionally, most lenders prefer that you have a credit score of 740 or better. While a lower credit score may not exclude you from eligibility, it may result in a higher interest rate.

How to Take Out a Home Equity Loan

Before you get a home equity loan, you should shop around at several lenders and compare loan terms, interest rates, and conditions. Find out how much equity each lender requires you to retain in your home to determine how much you’ll be able to borrow and whether this amount covers the costs of what you intend to use it for, such as paying off credit card debt, financing a college education, or making home improvements.

Make sure you understand the other costs involved in taking out a home equity loan such as closing costs, application fees and home appraisal fees (which some lenders may require), as well as attorney’s fees for document preparation, title search, and other legal costs.

Home Equity Line of Credit

A fixed-rate home equity loan offers a lump sum that you pay back over a fixed term at a predetermined interest rate. A home equity line of credit (HELOC) also uses the equity in your home as collateral, but instead of a lump sum, it allows you to borrow as needed, up to a certain amount, and for a set term (often five or ten years), with a repayment period of up to 20 years.

What is a home equity line of credit (HELOC)? A Home Equity Line of Credit (HELOC) allows homeowners to borrow cash to spend as they like, using their home equity as collateral. HELOCs function as a second mortgage, with the borrower withdrawing and repaying funds on a more flexible schedule, and the government allowing a tax deduction for interest payments. Unlike traditional first or second mortgages, a HELOC interest rate is not fixed; the rate varies from month to month.

Many homeowners need to sell their home before they have the funds to make a downpayment on a new one. But it can be challenging to get the timing just right; in a sellers’ market, your home may sell in a few days, but it could take months to find a new one. In order to avoid having to find temporary housing, some homeowners will get a HELOC loan in order to buy a new home before they put their current home on the market. If you’re in this situation, here are more options for buying and selling at the same time.

A home equity line of credit has an adjustable interest rate that may fluctuate with market conditions, so while interest rates are often lower, the total payments are less predictable. It’s important to carefully weigh all the costs and potential payment scenarios to be sure that you can afford the additional payment before taking out a home equity loan.

If you are thinking about selling your home soon, a Redfin real estate agent can advise you on which home improvement projects would pay off. They can also help you navigate through the tricky situation of buying and selling at the same time. Visit Redfin.com for more information on working with a Redfin Agent to sell your home.