If you’re a Florida homeowner looking for some extra capital to perform home improvements, consolidate debt, or finance a larger purchase, a home equity loan can be a great solution. When you make use of a home equity loan, you harness the money you’ve put into your home to meet your financial goals.
The great thing about a home equity loan is that you can use the funds you receive for almost any purpose. Many people use their funds to upgrade kitchens or bathrooms, bundle high-interest credit card debts into one lower monthly payment, and more.
If you’re looking for some extra cash to meet your financial needs, here’s what you need to know about Florida home equity loans.
What Is a Home Equity Loan?
A home equity loan is a loan that allows you to access additional funds by tapping into the equity you’ve accumulated in your home.
What does it mean to have equity in a home? Equity is the difference between the appraised value of your home and your outstanding mortgage balance. Essentially, it’s the portion of your home that you own outright.
You build equity in a few ways. One way is by simply paying your mortgage. The lower your principal balance is, the greater your equity becomes. You also build equity as the value of your home increases. Upgrading your house and changes in the Florida housing market can both increase your home’s value.
A home equity loan is also called a second mortgage. It’s a fixed-rate loan that uses your Florida home as collateral to secure it.
Since your original mortgage also uses your home as collateral, your home equity lender has the second lien position. As such, your rates are likely to be higher than your original mortgage, but not as high as other financing options such as personal loans or credit cards.
How Much Can You Get?
If you’re considering a home equity loan, you may be wondering how much you can get. You first need to determine the current value of your home.
Getting your home appraised will provide you with an accurate figure. You also need to know your mortgage’s remaining balance. The lower your mortgage balance, the more equity you’ll have. So, if your home is worth $400,000 and you have $100,000 left on your mortgage, you have $300,000 in equity.
Most lenders won’t lend you the full amount, though. They typically require you to keep 20% in equity. Using the same values above, you can calculate the maximum amount you may be able to borrow.
First, multiply your home’s value ($400,000) by 80% (0.8), which leaves you with $320,000. Next, subtract your remaining mortgage ($100,000), which leaves you with a maximum possibility of $220,000.
Reasons for a Home Equity Loan
There are several reasons why you might consider a home equity loan:
Home Repairs and Upgrades
Home repairs and upgrades are two of the most common reasons why Florida homeowners secure home equity loans. The interest paid on these loans to upgrade is tax-deductible.
Consolidating High-Interest Debt
Many Floridians carry credit card debt, with an average balance of just under $6,500. Interest rates for credit cards average around 16%. Carrying a balance entails paying a lot in interest every month.
Home equity loan rates are much lower. By consolidating your high-interest debts with a home equity loan, you can lower your monthly payments and reduce the total amount you pay in interest.
Some homeowners choose to finance their college education (or their child’s) with a home equity loan rather than taking out student loans. Rates for home equity loans can be lower in certain cases, making it a more attractive option.
Finance a Large Purchase
Instead of a personal loan, some people choose a lower-interest home equity loan to finance a large purchase, whether it’s a vacation, an engagement ring, or a wedding. Some people use a home equity loan to buy another house.
How to Get a Home Equity Loan
Now that you’ve learned a little about home equity loans, you might be wondering how to get one. The process isn’t all that different from getting a mortgage. Here’s what you’ll need to do:
1. Determine if You Qualify
While you might have plenty of equity in your home, lenders also consider various other criteria. In general, most look for:
- A credit score of 620 or higher
- A debt-to-income ratio of 43% or less
- At least 20% equity in the home
- The ability to repay the loan
2. Apply With Several Lenders
Apply with several Florida home equity loan lenders. Much like shopping for your first mortgage, shopping for multiple home equity loans will count as a single inquiry on your credit report. They should be done within a short period of one another, though.
3. Compare Your Options
Once you have your options in front of you, take some time to compare them.
Look at the rates and terms as well as all the attached fees to find the best deal. Even those offering similar rates can have significantly different additional costs.
4. Choose Your Lender
After you’ve carefully reviewed your options, it’s time to select your lender. You’ll sign your loan agreement, and the lender will disburse your funds.
Considering the Pros and Cons
Before you decide to get a home equity loan, you should take some time to identify the pros and cons to make sure that it’s the best option for you.
- Home equity loans have fixed interest rates
- Rates are lower than credit cards and personal loans
- You can use the funds for a broad range of purposes
- Interest paid on a home equity loan used for home improvements is tax-deductible
- Rates are slightly higher than a first mortgage
- If you default on your payments, you could lose your home
- You have to pay closing costs (which range between 2% and 5% of the loan amount) and other fees
You may also want to consider alternatives before you decide to apply for a Florida home equity loan:
- Cash-out refinancing: With a cash-out refi, you take out a loan for the new value of your home. It replaces your current mortgage, so you don’t have two. The funds pay off the balance of your mortgage, and you receive the remainder.
- Sale-leaseback: With a sale-leaseback, you sell your home to a company, and after paying off your mortgage, you receive the rest of the funds. You also have the option of remaining in your home as a renter, paying a monthly rent until you repurchase or move.
If you’re looking for additional funds to upgrade your Florida home, refinance debt, or make a large purchase, a home equity loan could be the solution you need. Although you must use your home as collateral, home equity rates are typically lower than an unsecured personal loan.
Be sure to talk to a financial advisor and consider the pros and cons, as well as potential alternatives, before you make your decision.