Taking a mortgage has its ups and downs but can be worth it at the end of it all. There are many benefits that come with mortgage payment such as increased credit score, increased chances of getting bigger loans and also home equity. If you make the payments on your mortgage such that the balance is less than your property’s worth, you start gaining some equity.
There are several ways in which you can turn the equity into cash or spending power. The best and most successful ways to access your home equity are taking a home equity credit line or taking out a home equity loan. The loan comes with a fixed interest rate which you are obligated to pay over a short period of time. A home equity line of credit is a credit line that allows you to draw and pay back continuously for a given time period. Most always start with adjustable interest rates and end up on a fixed interest rate.
The requirements needed to borrow a home equity loan will vary from lender to lender but there are a few typical standards you will find common. One of the things lenders look at before they give you the equity is your debt- income ratio. They calculate this ratio to determine whether you can afford to borrow more money amidst your current financial commitments and obligations. Aspects needed to calculate this ratio include your mortgage, loans, other financial obligations, child support, alimony, and leases. All these factors are divided by your monthly income to get the debt to income ratio. Lenders require a DIR of about 40% to give you a fixed rate home equity loan. If your debt to income ratio is high, you can definitely shop around to get some of the best deals.
Just like any other loan applications, lenders will require your credit score before they approve any applications. If you have a good credit score, you have a better chance of getting the home equity loan. So what is a good credit score? Depending on your lender, a good score can range between 700 credits and above. Anything slightly lower than that may land you some equity, but you will get some poor rates and high interest rates. While some lenders will put their main focus on the credit score, others will simply rely on other factors.
The borrowing on a home equity loan is limited regardless of the lender. In general, you are allowed to borrow 80-85% of your home’s value as equity. The mortgage debt on the home is not calculated in this case. If you have only complete half of the house payment, you can only borrow a percentage of that as equity. With a proper research, you will find lenders willing to offer you up to 89-90% of the price as equity.
Cash out refinance is a less popular way of accessing your equity, but it still helps. What you do is refinance into another mortgage and takes some of the equity in cash. The interest rate in the refinance will match that f your current interest on the incomplete mortgage.