Home Equity

5 Reasons to Get a Home Equity Loan

By Tom Burchnell

As a homeowner, your house is your most valuable asset when looking for quick cash. More specifically, there are several reasons why a home equity loan, which allows you to borrow money against the capital of your home, might be right for you. 

As you make monthly payments on your mortgage, the equity in your home increases. With a loan, you can convert the equity into cash to cover the costs of anything from credit card debt to your child’s college tuition. But there are many reasons to get a home equity loan—we’ll explore 5 below as well as some home equity loan alternative options that may be even better solutions for you. 

How Does a Home Equity Loan Work?

If this is your first exposure to a home equity loan, you may be a bit curious as to what the process may look like. Once you know what you can expect, you can better decide if it’ll work for your household.

For this type of loan, your home is used as collateral. Fortunately, you can use a home equity loan for anything. As a result, many choose to:

  • Finance big home renovations or landscaping projects
  • Cover the costs of a college tuition
  • Save it for future emergencies
  • Grow or jumpstart their businesses
  • Using a home equity loan for medical expenses and other related debt expenses

A home equity loan allows you to convert your home’s equity into a cash amount. There are two types of home equity loans:

  • Fixed-rate – You’ll receive the money in one lump sum and repay the money in fixed, monthly payment installments for five to 20 years.
  • Home equity line of credit (HELOC) – You’ll receive a revolving line of credit, which is dependent on the equity of your home. 

For the sake of this article, we’ll be discussing fixed-rate home equity loans. Now, let’s dive into 5 reasons for a home equity loan. 

1. You Want to Renovate Your Home

When homeowners want to undergo a home renovation, they’re often advised to look into a home equity loan for remodel purposes. That’s because these types of loans offer homeowners the freedom and flexibility to choose what they want to do with the money they receive. 

As such, if you’re looking to gut your kitchen, build a deck, or expand your two-bedroom home into a five-bedroom mansion, those are good reasons to consider a home equity loan. That’s because home renovations increase the value of your home, making the loan a positive investment in the long run. 

2. You Need a Large Sum of Cash for College Tuition

College tuitions require a sizable amount of money. That amount of money can be difficult to access on short notice. However, a home equity loan is one option that can help homeowners secure a large amount of funds. If you’ve already incurred these college tuition expenses, you can use home equity to pay off student loans.

As you know, you get a large lump sum of cash from your fixed-rate home equity loan. But, there is a limit to how much a lender will allow you to access. Typically a lender’s loan-to-value ratio is around 80% to 85%. Along with other calculations, this amount may not be enough. 

To that end, make sure you do have a good amount of equity beforehand, so you can afford your expenses.

Understand How Much You Can Borrow

Want to figure out how much of your equity you can access? Let’s do the math together:

  1. Multiply your homes value with the lender’s borrowing percentage. The result is the maximum limit of your home’s equity that you could borrow.
  2. Then, subtract that max amount from your mortgage value. This final figure is the amount of money you can borrow. 

Do these calculations before you seek a home equity loan to determine if this loan will be worthwhile for you. It’s important to mention that you want the estimate to match the amount of money you need to cover your expenses. 

3. You Have Sizable Emergency Expenses

If you’re experiencing an emergency, a home equity loan may be the best solution if you do not have another source of emergency funds. These situations can vary greatly, but an equity loan can provide you and your family with extra financial stability if you’re experiencing one of the following:

  • A large number of medical bills
  • Loss of a job
  • Major repairs to your car after an accident
  • Major renovations to your home for your safety
  • Economic hardship 

While a personal loan may also suffice, home equity loans have low interest rates that can benefit you down the line. When determining whether your reasons for a home equity loan over a personal loan are viable, it’s essential to calculate the equity of your home to ensure it has the amount of capital you need. 

4. You Want Pay off Debt With Low Interest Rates

Debt is a pain to pay off but difficult to avoid as life goes on. However, homeowners consider using a home equity loan to pay off debts

A higher interest rate from an unsecured debt such as credit cards can take years to repay. And all the while, you have to budget and restrict your everyday spending to do so. If you were to roll your debt into your mortgage, you’d swap your high-interest debt for a lower-interest mortgage. That means, you can:

  • Enjoy lower interest rates
  • Cover the costs of your debts sooner
  • Reduce the number of bills you have to pay per month
  • Save a few extra dollars from the change in rates

5. You Meet the Qualifications

Most people want to apply for loans they know they can get. And for that to happen, you need to make sure that you’re an ideal and eligible candidate. If you’re someone with the following qualification, a home equity loan may be the best option for you:

  • A credit score of 620 or above
  • A solid proof of income
  • A credible employment history

Home equity loan is often referred to as a “second mortgage.” Why is that? Well, they function in a similar way to your regular mortgage payments.

Lenders want assurance that you pose little to no risk of defaulting on your loan. So, they go over your credit and employment history like they did when you got your first mortgage. Plus, the better your credit history the lower your interest rates may be. Because of this, it can be hard to access your home equity with bad credit as you might get denied a home equity loan.

However, if you meet the qualifications and are looking for a large lump sum of cash, a home equity loan or second mortgage may be a reasonable next step.

How Not to Use a Home Equity Loan

You’ve worked hard over the years to build up the equity in your home, and as a homeowner, it can be your greatest asset. As such, you should be discerning when taking out a home equity loan. A home equity loan should be an investment in your long-term financial stability. 

To that end, it’s recommended that you avoid home equity loans if you’re looking to fund:

  • Luxurious vacations
  • Designer apparel or accessories
  • Groceries or insurance costs
  • Everyday expenses

Instead, home equity loans should be used for large expenses such as renovations, education, debt, and emergencies. Those kinds of expenses add value and will pay off in the long run, especially home-related projects that are tax-deductible.

Alternative Approaches to Access Home Equity

If you don’t qualify for a fixed interest rate home equity loan, there are other options you can consider to access your home’s equity. These include:

  • HELOCs – As mentioned above, this option is similar to a credit card. You can take out multiple loans over a 10 to 20-year draw period or until you reach a certain monetary limit. When that period ends, you begin to pay back all the money you took out. 
  • Cash out refinance – Instead of refinancing for a lower interest rate, you refinance your mortgage for more than the current mortgage balance. Whatever the difference adds up to be is the amount of cash you’ll receive. But, you’ll still be limited to 80% of the equity. For more details, learn how to do a cash out refinance.

Still not in love with your options? That’s okay because we’ve saved the best for last. 

EasyKnock: An Alternative Solution

A home equity loan is a viable option if you’re looking to renovate your home, pay for college tuition, or safeguard your finances. That being said, home equity loans use your home as collateral, which means if you’re unable to pay back the loan you may lose your house. 

If you’re looking for an alternative financial solution, EasyKnock offers a sale-leaseback program to help you stay on your feet and in your home. In this program, we buy your house and you remain a renter as you work toward your financial goals. 

We create personalized solutions designed to meet your needs, whether you’re looking to pay off debt, purchase a new home, fund your business, and more. Qualifying is easy, too—we look beyond your credit score, income type, and tax return and work with you to find a viable solution.

Use your equity to your advantage with EasyKnock. Get qualified today.

Key Takeaways

If you meet the qualifications, want access to a large amount of cash, and have the right reasons a home equity loan or second mortgage may be a reasonable next step for you. If you are unable to qualify, there are plenty of other alternative financial solutions for you to consider including a sale-leaseback, HELOC, or cash-out refinance. Be sure to consult your financial advisor to help you figure out which of these options will work best for you.

Sources:

Investopedia. A Guide for Home Equity Loans and HELOCs. https://www.investopedia.com/mortgage/heloc/ 

Citizen Bank. How to Calculate Your Home’s Equity. https://www.citizensbank.com/learning/how-to-calculate-home-equity.aspx 

CAP COM Federal Credit Union. Home Equity Loans: What To Do & What Not To Do. https://www.capcomfcu.org/blog/home-equity-loans-what-to-do-what-not-to-do/  

Investopedia. How to Get Equity Out of Your Home. https://www.capcomfcu.org/blog/home-equity-loans-what-to-do-what-not-to-do/ 

Maroo. How Much Does the Average Wedding Cost in 2022? https://www.maroo.us/blog/average-wed

-what-to-do-what-not-to-do/  

Investopedia. How to Get Equity Out of Your Home. https://www.capcomfcu.org/blog/home-equity-loans-what-to-do-what-not-to-do/ 

Maroo. How Much Does the Average Wedding Cost in 2022? https://www.maroo.us/blog/average-wedding-cost

Topics:
HEL
Home Equity
Home Equity Loan
Loans
Tom Burchnell Director of Product Marketing for EasyKnock, licensed real estate agent.

This article is published for educational and informational purposes only. This content is based on research and/or other relevant articles and contains trusted sources, but does not express the concerns of EasyKnock. Our goal at EasyKnock is to provide readers with up-to-date and objective resources on real estate and mortgage-related topics. Our content is written by experienced contributors in the finance and real-estate space and all articles undergo an in-depth review process.