How to Choose the Right Home Equity Loan

A home equity loan can give you money for a major expense, such as a roof repair, or funds that you can use to consolidate other debts. Here are some tips to help you find the loan that’s best for you.

Understand How a Home Equity Loan Works
Your home equity is the difference between your house’s market value and the amount you still owe on your mortgage. If you take out a home equity loan, you will be able to access part of your equity and receive money in a lump sum. You will have to make monthly payments at a fixed interest rate until the loan is repaid. 

A home equity loan is a second mortgage. The interest rate on a home equity loan is generally higher than the rate on a first mortgage, but it might be significantly lower than the interest rate on a personal loan or a credit card.

Find out How Much You Can Borrow
Your combined loan-to-value ratio is the sum of the amount you owe on your current mortgage and the amount you borrow through a home equity loan, expressed as a percentage of your home’s value. A lender will place a cap on your combined loan-to-value ratio.

Select a Loan Amount That Fits Your Budget
If you’re going to take out a home equity loan, you need to be careful not to get in over your head. With a home equity loan, you’re using your house as collateral. If you don’t keep up with your monthly loan payments, you might lose your house. 

Figure out how much money you can repay each month. Go over your budget carefully, look at your income and expenses, and calculate how much you can comfortably afford in loan payments. 

Think about your current employment situation and future prospects. If you’re concerned about a potential job loss, reduction in hours or a pay cut, taking out a home equity loan might be too risky. 

Choose the Right Lender
You don’t have to take out a home equity loan from the same company that services your first mortgage. You should shop around to find the lender that offers you the best terms.  

Each lender has its own guidelines that it uses to decide whether to issue loans and to set interest rates. If you have a high credit score, you’ll get a competitive interest rate and you might be eligible for a higher combined loan-to-value ratio than someone with a lower credit score. A lender will also consider your employment, income and debt-to-income ratio.