Financial Tips

HELOANs: The Smart Way to Use Your Home Equity.

A home equity loan (HELOAN) allows homeowners to convert their equity into cash. Borrowers typically receive a fixed interest rate and repayment period between 5-30 years.

Lenders offer home equity loans for up to 85% of your home’s appraised value. If you have a current mortgage, you must subtract this balance to determine the maximum loan amount. To illustrate, let’s assume your home is worth $450,000, and you owe $275,000 on the loan. Based on these figures, the borrower could borrow a maximum of $107,500. (450,000*.85 = 382,500 – 275,000 = 107,500)

If approved, you can generally use the funds however you see fit. That said, spending wisely and only borrowing what you can comfortably afford to repay is vital.

The Benefits of a HELOAN for Homeowners

Beyond the flexibility it offers, here are some other benefits of HELOANs to consider:

  • Only borrow what you need. You can request a loan amount that’s ideal for your financial situation.
  • Enjoy a fixed interest rate. The interest rate remains the same over the life of the loan, so you’ll know what borrowing costs to expect.
  • Monthly payments are predictable. You’ll also get a set monthly payment, making it easier to fit into your budget.
  • Flexible eligibility guidelines. A lower credit score may not keep you from accessing the equity in your home.
  • Tax benefits(1). The interest you pay on a home equity loan could be tax deductible, depending on how the funds are used.

How to Qualify for a HELOAN

The eligibility guidelines for home equity loans vary by lender. Most have these general requirements in place:

  • Home equity: You should have at least 15-20% in home equity. Calculate it by subtracting your mortgage balance from your home’s appraised value. So, if your home is worth $350,000, your mortgage balance should not exceed $297,500 ($350,000 * 0.15).
  • Credit score: Some lenders will approve you for a home equity loan with a credit score as low as 620. However, good or excellent credit is best to qualify for a competitive interest rate.
  • Debt-to-income (DTI) ratio: Your DTI should not exceed 43%. Compute this by dividing the sum of your monthly debt payments by your gross monthly income. So, if your monthly debt payments are $2,500 and you earn $6,000, your DTI is close to 42%.
Depending on the lender you select, you could be subject to more or less stringent guidelines.

Understanding the Risks and Responsibilities of a HELOAN

Although a home equity loan is a simple way to use the equity from your home, it’s important to manage it responsibly. These home equity products act as a second mortgage. So, you risk losing your home to foreclosure if you can’t make loan payments.

Tips for Managing Your HELOAN Responsibly

Before taking out a home equity loan, assess your financial health to determine if it’s a smart move. Will you use the funds to help improve your monthly budget? Or increase the value of your home? Or maybe invest in yourself by furthering your education to provide more lucrative career opportunities?

If you decide to move forward, use a loan calculator to figure out how much loan you can afford. The lender may offer you a larger loan amount. Still, you should only take out a loan with payments that won’t stretch your budget too thin.

Once the loan is funded, use it for the intended purpose and avoid the temptation to spend elsewhere. It’s equally important to make timely payments to protect your credit health. Paying on time also prevents you from racking up hefty fees or, even worse, facing foreclosure.

Using Your HELOAN Funds Wisely: Ideas and Inspiration

HELOANs are often used to cover both planned and unplanned expenses. You can make much-needed home repairs or upgrades. Another option is to consolidate high-interest debt into one affordable monthly payment. Or suppose you’ve been planning to continue your education. In that case, a HELOAN provides the funds needed to cover tuition, fees, and other related expenses. Some homeowners also use HELOANs to pay off medical debt or set aside for emergencies.

The options are endless with HELOANS. But the most important is using the funds wisely to get closer to achieving your goals. That way, you’ll avoid assuming an unnecessary financial burden.

Speak with a mortgage professional today to learn more about HELOANs or to get a quote.

All loans and lines of credit are subject to credit approval. Talk to a HomeTrust Bank Loan Officer for more information about HomeTrust’s HELOANS.
1. The purpose of this article is informational and does not substitute as legal or tax advice. Consult with your tax advisor or legal representative for more information regarding the tax deductibility of your loan.

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