Is Now the Time to Get a Home Equity Loan?

One of the most common questions I get from homeowners is whether they should apply for a home equity loan. They want extra money for a number of reasons: Remodeling their home, paying for college, buying a vehicle, launching a business or consolidating loans to name a few.

The appeal of a home equity loan is the relatively low interest rate. Because you’re basically borrowing off the equity of your home, banks consider a home equity loan a “secured” loan, and the interest rates can be between 2% and 7%, with the average interest rate slightly below 5%. This compares favorably to a conventional “personal” bank loan interest rate of 10% (or higher).

Whether you qualify for a home equity loan, and how much you can qualify for, is all about the numbers:

How much equity do you have in your home?

Equity is the difference between your mortgage and your home’s value. Usually you have to have at least 15%-20% equity.

What is your credit score?

Your credit score must be about 650 to qualify. The higher your score, the lower the interest rate.

Is your debt-to-income score 43% or lower?

This means that your debts (mortgage principal, interest, taxes and insurance; credit card debt; college loans; etc.) are lower than 43% of your income.

If you qualify based on these three criteria, then the related question is how much can you borrow? The rule of thumb is that you can borrow up to a combined loan-to-value ratio of 85%. Your combined mortgage and loan must be below 85% of your home’s value.

Even if you have equity in your home to back up the loan, lenders will want to be assured that you will be able to make the loan payments. They require that you have a steady income. Lenders also will look at your mortgage payment history. Any history of late payments would be of concern to them.

One final note: Interest paid on home equity loans used for other than home improvement is not tax deductible.

Start by contacting me!

As always, please feel free to reach out to me via phone, email and social media. I can help you figure out your ratios and how much of a loan you can probably qualify for. I’ll also give you guidance on the best lending options and solid referral sources I’ve trust and have been working with for years.

Fast Facts!
American homeowners had a combined $18.72 trillion in home equity in 2019!