Free up Some Extra Cash
If you’re looking for a quick and easy to free up some extra cash, a home equity loan may be something to consider. Simply put, the equity in your home is the difference in the amount of money that your house is worth and the amount of money that you still owe on your mortgage. For example, if your house is worth $200,000 and you have $125,000 still left to pay on your mortgage, then your equity would be $75,000.
A home equity loan allows you to access this money by using your house as collateral (meaning that if you fail to repay the loan, your home will be at risk). You’ll still be liable to make the mortgage payments, but it’s a great way of getting a large loan without resorting to specialist banks or credit cards. Many people apply for home equity loans to pay for home repairs or renewals to increase the overall value of their home, which in turn will increase the equity and allow them to make larger mortgage repayments.
While it’s a great way of getting your hands on money quickly, home equity loans are not all that easy to come by. Firstly, you’ll need to have a substantial loan to value ratio for the bank to even consider your application. This will typically be over 20% and as high as 40% at some banks. You’ll also need to have an excellent credit rating (at least 900) and proof of your finances to show that you’ll be able to make the additional repayments alongside your mortgage.
Interest rates on home equity loans will vary from bank to bank, but are usually cheaper than those offered on smaller loans. You’ll always get the best deal by talking to the bank who provides your current mortgage as they will know you as a customer and will be in a better position to give you a better rate.
So should you take a home equity loan? You need to closely examine your finances to see if the extra repayments are more affordable than setting a smaller amount aside into a saving accounts each month. You should also have a clear action plan of what you’ll use the money for, as it can be tempting to release all the money (you’ve paid for it through your mortgage, after all) and have it as a small slush fund, but you won’t be getting interest or payback on your gamble in the way that home improvements or repair will.