Both home equity loans and home equity lines of credit use your home as collateral.
A home equity loan works like a second mortgage, whereas a home equity line of credit works more like a credit card.
Read on to find out more about AMF Equity Loans, how to qualify, and which equity loan is the best option for you.
What is a Home Equity Loan?
A home equity loan (also referred to as HEL) is a loan where you can use the equity of your house as collateral to borrow a large lump sum. The value of your home is determined by an appraiser and your current equity, and the amount you can borrow depends on the value of your home.
Equity loans can either be fixed-rate or adjustable-rate loans, and you’ll have to pay the loan back within a specified period of time – usually between 5 and 30 years. Although you will pay closing costs, the amount will be much less than what you would pay on a full mortgage.
Many borrowers prefer fixed-rate home equity loans because they are as predictable as a regular interest rate.
You May Read: Benefits of Taking Out a Home Loan
Why Take Out a Home Equity Loan?
Home equity loans work best for borrowers who need a lump sum of cash for one large expense – such as a costly home renovation project. They are not intended to be used for small amounts of money, and most lenders will not grant them for amounts of $10,000 or less.
What is a Home Equity Line of Credit?
A home equity line of credit (also referred to as a HELOC) is a revolving credit line that’s based on the equity of your home. The lender sets the amount and limit, and the credit can be accessed at any time during the duration of the loan.
A home equity line of credit works like a credit card – you don’t have to draw the full amount of the loan, and when you pay it back the available amount of credit is replenished. This makes it possible to pay the loan back in full and re-borrow it again.
The repayment on a HELOC is usually between 10 and 20 years, and you only pay interest (which is generally tied to the prime rate) on what you borrow. However, a HELOC may come with annual fees, and you will be required to pay closing costs.
Why Take Out a Home Equity Line of Credit?
Home equity lines of credit work best for people who need different amounts of cash over time. Unlike a home equity loan, a home equity line of credit allows you to borrow only what you need – like a credit card.
What You Need to Qualify
Usually, lenders will require you to have a loan-to-value ratio of at least 80% – which means you will need to have paid off more than 20% of your mortgage before qualifying for a home equity loan.
Lenders will also check your credit rating, whether you have stable employment, and if you have a solid record of income.