Benefits of Home Equity Loans

Home equity loans offer multiple benefits for homeowners in need of funds for various types of projects. Read about the benefits of home equity loans now.

Understanding the benefits of a home equity loan requires understanding details pertaining to home equity combined with a thorough knowledge of current mortgage rates and programs. Because you already own your home you have some experience with the home mortgage process. Several significant differences exist between home loans and home equity loans, however. These differences include certain qualification criteria. Differences also include the ways in which your long-term financial prospects are impacted using home equity as collateral. Continue reading to learn the top reasons to apply for a home equity loan and the benefits these types of loans offer.

Understanding Home Equity

Equity in finance is described as the direct ownership interest an investor has in an asset minus all claims against said asset. Home equity is defined as the current market value of your home (and applicable property) minus any debt and/or liens attached to the home. For example, if the gross value of your home is $500,000 but you owe $300,000 in mortgage debt, liens or other debts against the property, your net home equity is $200,000.

Home equity fluctuates in value over the entire length of time you own your home. Your equity increases each time you make a mortgage payment and your debt against the home decreases. Market and global circumstances also impact the value of your equity and cause it to fluctuate up and down with conditions as applicable. Home equity is usable as collateral to secure funds for a wide variety of purposes. This is accomplished by obtaining a home equity loan from a participating home mortgage lender.

What Is a Home Equity Loan?

A home equity loan is a type of mortgage taken out against your home using its equity as collateral to secure the funds. Because most homeowners still have a mortgage on their home, home equity loans are also commonly referred to as “second mortgage loans,” or “second mortgages.” This means funding amounts for home equity loans are typically smaller than those approved for primary mortgages. A home equity loan is generally easier to obtain than a primary mortgage, however, provided the following criteria are met:

  • Your equity is of an adequate amount to cover the funded amount and higher.

  • Your credit rating and FICO score are both still strong.

  • Your income and employment history are stable and meet loan program requirements.

Differences Between a Home Loan and a Home Equity Loan

A home loan is typically a primary first mortgage, which provides the funds necessary for you to purchase your home. A home equity loan requires you to already own your home and have built up enough equity in the property to qualify for a second mortgage. In both cases, your home serves as collateral against the borrowed funds.

Terms and interest rates (APRs) are significantly different between home loan and home equity loans, however. Successful applicants for home equity loans have also exhibited a history of satisfactory mortgage payments along with continued good credit and stable income beyond what is typically possible for primary mortgage applicants (as a simple matter of course).

Reasons to Get a Home Equity Loan

Multiple reasons exist for obtaining a home equity loan. Multiple benefits exist from taking out this type of loan as well. Below are a few select examples of reasons to get a home equity loan, in addition to the benefits obtained from acquiring funds from this type of loan program.

Home Remodeling and Additions

Home additions are favorable and even necessary for a wide variety of reasons. Perhaps you are expanding your family and need more space. This could be due to a newborn child on the way or because your elderly family members in-need are moving into your home late in life. Home renovations become necessary after damage is incurred from fires, floods, accidents, or other types of natural disasters. Home renovations also increase the value (and imminent or eventual selling price) of your home.

  • Benefits: Occasionally, home equity loans are easier to obtain at lower APRs when funds are used for home improvement purposes. Home improvements increase the value of a home and therefore its equity. This means the collateral (equity) is not only more secure but also provides the borrower with more financial leeway.

Investing In a Business

Opportunities to open and/or invest in a quality business must be seriously considered. A home equity loan might provide you with the funds you need to positively change your life and the life of your family’s in perpetuity. Opening and/or investing in a company with a solid business plan and proven credentials is an appealing consideration for lenders.

  • Benefits: APRs on loans for this purpose might not be quite as favorable as those offered for home improvement purposes. Still, lenders who see the value in the business and the potential for profit are unlikely to turn down a borrower for this type of loan who otherwise meets credit and income requirements. 

Unexpected Bills

Obtaining a home equity loan to pay off unexpected medical bills or other types of bills or debts might be a harder sell to make to some lenders. This is not to say it is impossible to accomplish, however. Lenders understand the way life brings many unexpected changes to consumers. If you have adequate equity, good credit, steady employment, and a favorable income history you have just as good a chance as any other borrower to obtain a home equity loan for debt consolidation purposes or to pay off unexpected high bills.

  • Benefits: Home equity loans typically offer lower APRs than most other types of loans for debt consolidation and the payment of unexpected bills.

Do I Qualify for a Home Equity Loan? Here’s How to Know

Qualifying for a home equity loan requires you meeting certain criteria. First, you must have a minimum of fifteen-through-twenty percent equity in your home. Your credit must be at least as good as it was to qualify you for your first mortgage, if not better. Your debt-to-income ratio (DTI) must meet program requirements. Your income must be and have remained stable for several verifiable years. Finally, you must also have a proven reliable payment history on your home mortgage and other open credit accounts.

Top Banks and Lenders Offering Home Equity Loans

Bank of America is an example of a popular traditional bank, which offers in-person and online home equity loan services alike. Bank of America is currently offering a 5.150% variable APR on a home equity line of credit (HELOC). Veterans United also offers home equity loans to qualified current and former members of a U.S. military branch. An example of a highly popular online-only lender for home equity loans is Quicken Loans.

Quicken loans provides multiple useful tools on its company website to help borrowers understand all options available and locate the best type of loan for their needs. Additional top banks and online-only lenders offering home equity loans in 2022 include: