Home Equity Dallas
There Is Power In Your Home's Equity
The American Dream is to own your own home. It symbolizes stability, success, and investment in your future. Owning your own home comes with many perks, one of them being that you no longer have to pay rent for someone else's property. Instead, your monthly home mortgage payments go toward building equity. As a homeowner, you can tap into your equity to borrow money for home improvement projects, college tuition, or other major expenses. A home equity loan is a type of loan that allows homeowners to borrow money using the equity they have built up in their home as collateral. Let's look at how home equity loans work and what you need to know about them.
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What is Home Equity?
Home Equity loans offer homeowners a smart financial alternative, empowering them to borrow money based on the available equity in their home. This can be a more cost-effective solution compared to personal loans and credit cards, putting you in control of your finances. Mortgage lenders typically offer two main types of home equity loans: A home equity loan and a home equity line of credit (HELOC).
Types of Home Equity Loans
- Fixed-Rate Home Equity Loan: Provides a lump sum of money with a fixed interest rate and regular monthly payments over a set period, usually 5 to 15 years.
- Home Equity Line of Credit (HELOC): This type of loan works like a credit card. You can borrow up to a certain limit for a period, known as the draw period, usually 10 years. After the draw period, you enter the repayment period, typically 10 to 20 years.
Home equity loans, considered second mortgages that are secured by your property, offer a high degree of flexibility. They are popular because they do not require you to refinance your first mortgage, which is especially important if you are content with your current interest rate and payment. You can use the funds from our home’s equity for whatever you want, including home improvements or any other major expense, giving you a sense of financial freedom. Plus, home equity loans typically have a lower interest rate than credit cards and personal loans, making you financially savvy and in control of your finances.
How Much Equity Do I Qualify For?
The loan amount is based on the difference between your home’s current market value and the amount you owe on your mortgage. Getting approved for a home equity loan requires you to have a minimum of 20% equity in your home. Typically, the maximum amount you can borrow is 80% of your home’s equity availability, but that depends on the lender’s requirements.
For example:
Consider a home valued at $350,000 with a $100,000 mortgage.
$350,000[home value] x 80% = $280,000
$280,000 - $100,000 [outstanding loan balance] = $180,000 [available equity]
According to Zillow, the average Dallas home market value is $319,020. Which is up 2.7% in the past 1 year. Depending on your market, the average home value plays a big role in the appraisal of your home value.
Interest Rates
If you have decided that a home equity loan will improve your financial position now and, in the future, it's time to start looking for good home equity loan rates. To choose a loan package that will work best for you, it's important to understand some basics of home equity rates and have a few prepared questions to ask your mortgage lender.
Interest rates on home equity loans, just like mortgage loans, can change based on market conditions, so the rate you get will depend on when you apply. Home equity loans typically have lower rates compared to other types of loans because they use your home as collateral. Remember that interest rates differ between lenders, so it's important to compare rates from different lenders to find the best option.
What Do You Need to Apply for a Home Equity Loan
The application process is different for every lender, but generally, these are the typical steps that you will follow:
- Submit Application – The information needed in an application is usually the same for each lender. You must provide your full legal name, Social Security number, property information, income verification, current mortgage, and, if adding a cosigner, that individual’s information.
- Within three (3) days of sending a completed loan application package with supporting financial documentation and terms of request, your lender will provide you with a loan estimate. The loan estimate will outline the estimated costs of the loan request you applied for.
- Appraisal—Depending on when your home was last appraised, the lender may require a new appraisal to reassess its value.
- Underwriting – Once the application has been sent and the appraisal is completed, if necessary, the underwriter will assess all the information to decide your creditworthiness. Once the loan is approved, the application will move into the closing process.
- Closing—Once all applications are approved, you will sign your closing documents, and the loan officer will make a final review before your funds are released.
Pros and Cons of Home Equity Loans
Like other financial products, home equity loans have potential advantages and disadvantages. Let’s examine some of these to help you make a more informed decision.
Advantages of Home Equity Loans
- Fixed interest rates: Home equity loans typically have fixed interest rates, which means consistent monthly payments throughout the loan term.
- Flexible use: The funds from a home equity loan can generally be used for various purposes.
- Potential tax deductions: Sometimes, the interest paid on a home equity loan may be tax-deductible. Speaking with your lender and a qualified tax professional can clarify whether this may be the case for your prospective home equity loan.
- Large Sum: Borrowers can access large amounts of money, depending on how much equity they currently have in their home.
- The proceeds from a home equity loan are unlimited, but improving your house can increase its value even more.
Disadvantages of Home Equity Loans
- Your home is collateral: Since the loan is secured by the home itself, there’s the potential risk of foreclosure if the loan isn’t repaid as agreed.
- Added debt: Taking out a home equity loan means more debt and requires added financial management.
- Closing costs: A home equity loan may have closing costs and other fees like a first mortgage.
- Reduced equity: Borrowing against it reduces the total equity you have in your home.
Pitfalls to Avoid When Applying for a Home Equity Loan
Shopping, applying for, and getting a mortgage loan is a complicated process, and there are many potential missteps borrowers can take along the way. Be sure to avoid the following four pitfalls when you apply for a home equity loan.
- Forgetting about Closing Costs
- Ordering Your Own Appraisal
- Borrowing More than You need
- Choosing the Wrong Lender
How to Use Home Equity Loans
- Home Improvements are one of the most common uses, as they can increase the value of your home. Many use them for home improvement updates such as bathrooms, kitchens, inground pools, and home additions. According to RealWealth, the Dallas housing market continues to outpace the national average in home prices. This is a positive indicator for investing in your home.
- Debt Consolidation can help pay off high-interest debts with a lower-interest-rate loan.
- Major Expenses can include medical bills, education, or emergencies.
Alternatives to Home Equity Loans
- Cash-Out Refinance: Refinance your existing mortgage for more than you owe and take the difference in cash.
- Personal Loans: Unsecured loans that don’t require collateral but may have higher interest rates.
- Credit Cards: For smaller amounts, though they generally have higher interest rates and shorter repayment terms.
A home equity loan lets you borrow against the equity you’ve built in your home, possibly with more favorable terms than a more traditional loan. It’s important, however, to remember that you are borrowing against the equity you’ve built in your home and that failure to repay your home equity loan may have implications for your ownership. Speak with a qualified home lending professional to learn more about how a home equity loan might prove valuable to you.
America’s Credit Union Can Help
At America’s Credit Union, our experienced and knowledgeable mortgage lenders work with members to help them determine whether a home equity loan is right for them.
With our personalized home mortgage loan approval approach, we offer flexible loan terms, low closing costs, no prepayment penalty or fees, and competitive home equity loan rates. Also, we serve all our loans in-house, meaning you can continue visiting the same Credit Union location and working with the same lender and member service representative throughout your loan.
We encourage you to visit a mortgage lender at America’s CU to find out what is needed for a home equity loan and learn more about applying today.
Banking with America’s Credit Union in Dallas, Texas, opens opportunities to improve your financial journey today and in the future.