If you own a home and have some equity in it, you might want to consider using it. First, how do you know if you have any equity in your home?
The equity in your home is the difference between what you owe on the home and what it is worth. For example, if you owe $150,000 on a home and it is valued at $200,000. You have $50,000 equity in the home. However, you will not be able to borrow that entire amount. Usually, lenders will only allow 80% of the equity to be made available for borrowing.
Depending on many factors, you might be able borrow that money. Some reasons to borrow are:
- Home remodeling
- Purchase a car
- Pay for a college education
- Pay for medical bills
- Consolidate debts
One of the biggest advantages to borrowing money this way could be tax savings. Though you have to check on this with your lender, most home equity loan interest payments are allowable as a tax deduction on your personal income tax. This works much like the first mortgage.
One potential disadvantage is that, much like a first mortgage, if you do not make payments on the home equity loan, you could potentially lose your home.
Information Needed to use a Home Equity Calculator
Online calculators are great to develop scenarios that will eventually get you to your financial goals. The internet has a plethora of home equity loan calculators, mostly on commercial sites, that you can use to help determine the particulars of your financial situation.
Following is the information you will need to gather to use the calculators:
Value of the home: you will need to know the current value of your home. There are several ways to determine this:
- Contact a realtor to see what homes in the area are selling for (not the listing amount, the actual selling amount)
- Check on Zillow or other online sites for the prices of homes in your area
- Get an appraisal (in most cases, you will need to get an one anyway as part of the loan process)
Mortgage remaining: As stated above, you will need to determine how much you have left to pay on your mortgage. Keep in mind you will only be able to borrow a pre-determined percentage of that amount (usually 80%).
Current payments: Know your current loan payment (mortgage and interest only). Your property taxes and insurance payment amounts will not be impacted by a home equity loan.
Amount to be borrowed: Determine how much you would like to borrow.
Interest rate: Determine what the interest rate will be for the new loan.
Term: Decide how long you want to take to pay the loan back. The longer you take to pay it back the lower your payment will be. However, you will have to pay more in total on the loan.
Closing costs: Just like in your first mortgage, you will incur fees (appraisal fee, loan origination fee, another title search, etc.) during the processing of the loan. Looking at the closing costs of the first mortgage will give you an idea of what and how much they will be. You can pay the fees outright at closing or have them rolled up into the loan.
Points: See if the loan you are seeking comes with points which are a typically one percent of the loan amount.
Calculate Scenarios
Calculators are great to develop “what if” type scenarios depending on what you want to calculate. For example:
- You might want to calculate for the amount of payment you have to make. The payment for the loan will not be a part of the payment for your first mortgage (unless you are refinancing, which is a different process). It will be an extra payment so make sure your monthly budget can handle it.
- If you want to get the payment to a certain amount, you can change the payment length or amount that you want to borrow. This will enable you to figure out what you need to select to get the payment where you want it to be.
- Calculate the true expense of the loan: With the tax savings you may get, you can calculate how much money the loan is actually costing you after those savings are factored in.
As with any home loan, your credit score will be used to determine, along with other factors, if you can get the loan.
Finally, kind of a mini-closing will occur where you must sign all the appropriate papers.