If you have a mortgage, then you are more than likely making monthly payments which reduce the principal of the loan. Part of that money goes toward interest, but once you make enough payments, the home will be worth more than you owe on it. When that happens, you may be able to borrow money against the value of the home. Keep in mind that the original mortgage is still applicable, and must be paid off. If you can manage two mortgage payments a month, and have a need for some extra cash, you may be interested in the following tips on how to borrow from your home’s equity.
You Have Two Choices
When you go to a lender to find out about getting a loan based on the equity in your home, you will have two basic choices: a home equity loan or a home equity line of credit. Both forms of home equity loans have their merits, which your lender will be happy to tell you about. Either way, it is essentially a second mortgage, which means you’ll be making two payments every month--one for your original mortgage and a second payment on the home equity loan.
You May be Limited to a Minimum Amount
If you intend to borrow money based on the equity in your home, you need to be aware that various lenders may require a minimum amount for a loan. Some will allow you to borrow as little as $1,000, but frequently lenders prefer that you borrow a more significant amount. In some cases, a lender may require you borrow at least $10,000 or more. The thinking is that lending a smaller amount of money won’t bring them enough return in interest payments--essentially, it won’t be worth the time and trouble to fill out the paperwork.
Check Your Credit Score
Before you talk to a lender about the possibility of borrowing money against the equity of your home, you should check your credit score. The higher your credit rating, the less you’ll have to pay in interest. If your score could stand to be improved, you should take steps to bring it up before you borrow any more money.
List Your Debts
If you’re considering borrowing money from your home’s equity, you should make sure you’ll be able to make the extra payment each month. A home equity loan doesn’t reduce or eliminate your original mortgage; it is merely another mortgage--another payment that must be made along with all your usual bills. Before you sign any papers, you should make a list of all your monthly bills, and compare it with your income. Determine whether or not you’ll have enough money left over each month to make the equity loan payment. Because this is an extra loan, it shouldn’t be used for frivolous matters, such as a vacation. Instead, a home equity loan would be better suited for something that will continue to improve your life or that of your children--frequently people will borrow against their home’s equity to pay for a child’s education. Home equity loans are also used to finance a business or to perform home improvement work which will ultimately make the home more valuable.
See a Counselor
Since you’re thinking about borrowing from your home’s equity, it would be a good idea to get some professional advice to make sure you’re not getting in over your head. You should see a financial advisor or counselor to determine whether or not it is a sound financial move. A counselor will want to see all your financial reports, including all your bills and your income statements. They will be able to tell you if the loan you’re considering taking out would be advantageous or detrimental to your overall financial health. They will also be able to help you set up a budget to make sure all the bills get paid on time.
Guest post from Harper Ryan. Harper writes for HomeLoans.org.
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I'm Louida from Atlanta, Georgia and I'm a mother of two daughters, and a full-time blogger/influencer.
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