Home equity loans are a type of secured loan with a low interest rate.
This means that although you can often get a fairly cheap loan at a fixed rate, you will have to secured it with your home. This may or may not be a good option, depending on the amount of risk that you are willing to take.
If you have a good stable income, taking out a long term, fixed home equity loan may be a good option for you in order to finance a business, do home renovations, or consolidate your debt.
This cheap money can be used to finance other projects, but should always be respected because your personal residence will be put up as collateral
How much can you borrow with a fixed rate home equity loan?
Home equity loans allow you to borrow a large amount of cash in exchange for putting up your home as collateral.
Since you are putting up a piece of property that has a high value, you will be able to borrow a significant amount of money for a low fixed rate. A home equity loan allows you to tap the current equity that has been paid into your home. The amount of money you will be able to borrow depends on your current credit situation, the principle that is still left on your mortgage, and the current market for your home.
If you have $200,000 worth of equity in your home, you may be able to borrow this full amount. The terms, fees, and repayments will vary depending on your credit and your personal financial situation.
Why should you get a fixed rate loan?
When you apply for a loan, you will often have the choice between a fixed and an adjustable rate.
After the 2008 mortgage crisis, it is quite easy to see the benefits of a fixed interest rate vs. an adjustable rate mortgage. Adjustable rates will change along with the federal interest rates. If these federal interest rates go up, your monthly mortgage payments can go up significantly.
For this reason, taking a higher “fixed” interest rate often makes more sense for the borrower, even though it will be more expensive. This fixed rate will allow you as a borrower to reduce your overall risk and make sure that your monthly payments will not jump significantly if federal rates increase.
Adjustable rate mortgages (or ARMs) can be useful for certain situations. These would include a shorter loan time, a temporary loan, or if you were in a particular financial climate where you believed federal interest rates would go down.
What are the average interest rates on a home equity loan?
The average interest rate on a fixed home equity loan will vary from around 6% to 12%.
Rates will change based on the risk to the lender. A lender will evaluate you as a potential borrower by your credit score, your financial history, and your employment history.
Since the 2008 financial crisis, lenders have really tightened up on the amount of money they will lend and the interest rate they will lend. For this reason, you may not be able to borrow the full amount of equity that is available in your home. Some lenders will only let you borrow about 30% of the equity that is available within your home. They like to see about 20% or more in equity to stay left within the home.
In order to get a home equity loan, a lender will usually expect a good credit score. In many cases, this score will have to be around 700 or better. You will need documentation to prove you can repay this loan. This documentation will include bank statements, referrals, and other types of paperwork. These days lenders can be much more strict with their lending. You will have to prove yourself and your lender will have to be confident in your ability to repay these loans.