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Published at May 14, 2019 by Ana-Maria Sanders
How to borrow against your house when you haven’t finished paying off the mortgage.
Equity is the amount owned of something that you took out a loan to buy. You won’t have much equity early on in a loan. As you get closer to the due date, though, your equity will eventually be larger than what you owe.
Let’s say you’ve been faithfully paying back a standard, 30-year mortgage for 20 years. You’ve built up about 66-percent of the value of the home in equity. If something should happen to leave you unable to finish paying off the loan and the bank should foreclose on the house, then you would be entitled to 66-percent of the sale minus certain fees. So, that equity is yours. It’s money in the bank, so to speak.
A home-equity personal loan is where you borrow using your house as collateral. The provider will want you to have at least 40 percent equity in your house, meaning that you’re almost halfway through the mortgage. Many lenders will not offer you this type of loan if you have more than 90 percent equity in your house.
If you are unable to pay back your home equity loan, then there is a very real chance that you will lose your house. The bank will sell it, and you will not see a cent of the profit. We probably don’t need to tell you this, but this is a bad shake.
Your home is worth a lot more than what you’ll get through a home-equity loan, so losing the house after paying a portion of the loan back equals a big financial mistake. Here’s an example:
In the example above, the customer suffers a net loss of $100,000. If they had sold their house instead of taking out a home-equity loan, they would have been able to pocket the equity they had in their home. They also wouldn’t have made any payments to the lender.
Clearly, losing $100,000 for $20,000 is not a good investment. This is the main risk of taking out a home equity loan: you agree to use something as collateral that is worth more than what you are receiving in return. For many, an unsecured personal loan is a more comfortable option.
As shown in the example above, a home-equity loan is not risky for the provider, as they stand to make more money if you default on the loan than if you pay it off. Less risk for the lender usually means lower interest rates for the borrower. Although, if you have a bad credit score, you may end up with high-interest rates anyway because the provider knows you won’t be able to find a loan for less anywhere else.
Another benefit may be an easy application process. Again, because the loan is safer for the lender, there may be fewer hoops to jump through to get the loan.
As long as there is no prepayment penalty, you should be able to pay the loan off early to avoid some of the interest.
When shopping for a second mortgage, you will naturally want to go with the offer with the lowest fees and interest rate. But, it’s also important to make other considerations besides just looking for the cheapest home-equity loan:
Consumers have been known to use the following home-equity loan companies:
Be careful searching online for which bank has the best home equity loan. There are comparison sites out there that will bid on that term to make money off you. They usually list their “best of” lists according to the companies that will pay them the most for sending over traffic. Instead of you finding the top rates, you end up with whichever company was willing the pay the most for your lead. There’s a chance the company may even charge you more than usual to make up for the money they lost having to shop for you.
You can use any interest calculator to figure out how much your home equity loan is going to cost. Chase offers a home value estimator and a home-equity line of credit calculator to help you get a ballpark figure of how much you may receive and how much the loan will cost you.
The calculators are easy to use. You simply punch in the information you have or use their onsite tools to figure out the information you don’t have. You should know that Chase offers this in hopes that you will continue the process of applying for a loan through their site.
The amount of your loan will be based on the current market value of your house. That means it’s to your benefit to borrow during a bubble. It’s the same logic you’d use if you were selling your house. You want your house to be worth as much as possible when you take out the loan because that’s when your equity is worth the most.
Of course, you should never borrow more than you need. The bigger the loan, the more interest you may end up paying. That said, there is always a risk of default, and if you are going to lose your house in the end, it’s better to get as much upfront as possible.
A reverse mortgage is not the same as a home-equity loan. To be eligible for a reverse mortgage, a consumer must be at least 62 years old, live in the house, and fully own the house. The following products are more like a home-equity loan:
No matter which way you use your home as collateral, it is equally important not to default on the loan. The equity in your home is likely your best investment. Try to keep it that way.
