Owning a home is a big investment. If you’re like most people, your home is the most expensive thing you’ll ever buy.
It can be reassuring to know that a significant amount of your net worth is secure. After all, as long as you own your home, you have a valuable asset that you can use as a source of funds. The question is this: how do you actually access that value?
That’s where home equity loans come in. A home equity loan is a type of second mortgage. When you take out this loan, your lender gives you a lump sum of money that you agree to pay back over five to thirty years.
Your home is connected to the process in two ways. First, you can only take out a loan that’s less than your equity in your home or the amount of your home’s value that you’ve paid off so far. Second, you agree that if you fail to pay back the loan, the lender can foreclose on your home to get the money they’re due.
Obviously, there are some significant benefits and equally big drawbacks regarding home equity loans. Let’s dive into the pros and cons of these loans, what you need to get one, their alternatives, and how to get started.
The Benefits of Home Equity Loans
Home equity loans have a few significant benefits that make them attractive to people who need a loan. These benefits include:
- Almost complete freedom with the money. Most types of loans have to be used for a specific purpose. Home equity loans, on the other hand, can be used for just about anything.
- Low borrowing costs compared to unsecured loans. Home equity loans don’t carry the same fees as unsecured loans or credit cards, so they’re cheaper in the long run.
- Fixed interest rates. Unlike credit cards or unsecured loans, home equity loan interest rates will stay the same for the loan’s lifetime.
- Potentially tax-deductible interest payments. If you use your home equity loan to improve your house, the loan’s interest is probably tax-deductible.
The Downside of Home Equity Loans
Of course, the major benefits of home equity loans can also be their drawbacks. For example, home equity loans lead to:
- Higher rates than home equity loan alternatives. There are several secured alternatives to home equity loans in Tennessee that don’t charge borrowing costs like closing fees.
- The potential to lose your home. If your financial situation changes and you can’t pay back your loan, your house may go into foreclosure.
- Taking on a second mortgage payment. A home equity loan is a second mortgage, and payment amounts reflect that. Taking out this type of loan leads to high monthly payments.
What You Need to Get a Home Equity Loan
To get a home equity loan in Tennessee, you need to be prepared with a few things.
First, you need to own your home and have a minimum of 15 to 20% equity in your home. Many banks won’t offer these loans to people with less since the amount they can lend you is based on your current home equity.
Next, you need to have a credit score in the mid-600s or above. A credit score below this threshold makes most people ineligible for loans since it generally demonstrates a poor payment history.
Finally, you should have a debt-to-income ratio of 43% or lower. The higher your income and the lower your debt, the more comfortable your lender will be with your ability to repay the loan. Lenders never want a home to go into foreclosure; it’s a lot of work for them compared to a reliable repayment schedule.
Tips and Tricks for Your Home Equity Loan
Before you apply for any loan, there are a few home equity loan tips you can use to ensure you get the best possible rate.
- Make sure you’re getting a loan for the right reason. Before you begin the process of getting a second mortgage, make sure it’s worth it. Fixing up your house is an excellent reason to get a home equity loan since the interest payments will be tax-deductible.
- If you can, wait a few months and work to boost your credit score. If you can pay down your credit cards and catch up on overdue bills before applying, you may be able to boost your credit score significantly and reduce your interest rates.
- Aim for a healthy LTV. LTV, or Loan-to-Value, is the ratio of your loan amount to the equity in your home. Aim to take out a loan that’s less than 80% of your equity to keep payments manageable and avoid high debt-to-income ratios.
Home Equity Loan Alternatives
If a home equity loan doesn’t seem to fit your needs, don’t worry. A couple of easy alternatives to these loans will let you access your equity quickly and easily.
A Tennessee home equity line of credit (HELOC) is similar to a credit card, but it’s secured by your home. Instead of paying out a lump sum, they offer you a line of credit up to the equity you have on your home. You can pay off the amount you withdraw monthly, just like a credit card. It also avoids closing costs. However, you don’t get a lump sum.
If you need a lump sum, then a great Tennessee home equity loan alternative is a sale-leaseback. With this method, you sell your home but continue to live there — you just pay monthly rent. This lets you convert your home equity to cash without leaving your home. The downside is that you no longer own your home. It isn’t a loan, so you don’t have to pay it back. It’s an alternative solution for people who have less than ideal credit or don’t want to leave their homes.
Your First Steps to Accessing Home Equity
No matter what type of option you choose, your first step should be to talk to lenders and get quotes. Compare different lenders’ offerings to make sure you’re getting the best deal. While many people start with the bank that has their current mortgage, you should never stop there. Explore every option and never hesitate to talk to the experts.
In Tennessee, many people’s net worth is tied to their homes. If you’re in this situation and you need to access your equity, you have alternatives. From home equity loans to HELOCs to sale-leasebacks, there are plenty of alternative options that will allow you to access your money now, when you need it, without leaving your home. Talk to a financial expert today to discuss your options.