According to the Federal Trade Commission, a home equity loan is a “loan for a fixed amount of money that is secured by your home.” These loans are repaid similar to a mortgage, with fixed payments over a set term – for example, $99/month for 10 years.
Home equity loans can be preferable if you have equity built up and if you’re looking for a non-variable and predictable payment schedule. This type of loan is desirable to many homeowners because interest rates tend to be much lower than on personal loans and loans offered through a roofing company. Unfortunately, it can’t be all sunshine and rainbows. There are notable downsides to this method of financing…
The most substantial drawback of a home equity loan is that if you fail to make payments (aka ‘default’ on the loan), the lender can foreclose on your house! This is because the collateral for the loan is your home. As you can imagine, most lenders require great credit scores and continuous income to qualify for a home equity loan. If this sounds like you, then we suggest looking into it.
And if you want to estimate how much funding may be available to you by means of a home equity loan, use this formula to calculate your available equity:
- Get the current value of your home
- Subtract the amount you still have to pay on your mortgage
- Multiply the difference by .85
You can only borrow 85% of your available home equity by law, so if the current value of your home is $400,000 and you owe $350,000, then the outstanding amount is $50,000. Now multiply that $50,000 by .85 (to get 85%), and your available home equity is $42,500.
As you can see, the amount of funds that may be available to you through a home equity loan could be substantial. So, if you think this is a viable option, reach out to your bank or chosen lender to check current interest rates and availability.