Home equity loans are a very powerful financial product which can help homeowners liquidate their home equity and use the funds for various purposes. In order to get a home equity loan, the borrowers (homeowners) need to have home equity. This is calculated based on how much of the mortgage (principal amount) they have paid plus the current market value of the house. For married couples, joint home equity loans are also an option worth exploring which we will discuss in this article in detail.
What Is Joint Home Equity Loan
A joint home equity loan functions the same way as a regular home equity loan taken by a single person. This loan acts as a secondary mortgage which can be taken against any home equity and can be used by the borrowers for purposes like home improvements, repairs, etc. The house is put as collateral when securing a home equity loan to safeguard the lenders’ financial interests.
This type of a loan typically comes with a fixed rate of interest as well as repayment terms which can extend anywhere between 5 years to 30 years. This means that the couple can plan their financial future without any fear or scope for repayment amounts to fluctuate which may derail their plans.
A joint home equity loan can be taken by any two co-signers like siblings, parents and children, and a married couple. A loan taken by a married couple allows them to act as co-borrowers to the loan. However, a condition that they need to fulfill is that both the individuals need to qualify all the eligibility criteria set by the lending authority. A key feature about joint home equity loans is that both the borrowers hold the same position in the debt, which means that both of them also bear equal responsibility for the loan and can be held equally liable in case of defaults.
A significant advantage of a joint home equity loan is that in cases where one spouse does not have good credit and the other does, the good score can balance out the poor one, ensuring that the couple is able to secure the loan. This also helps in ensuring that the couple is able to secure more suitable loan terms than they would have gotten if one one spouse had applied for the loan.
How Does A Joint Home Equity Loan Work
It is essential to know how a joint home equity loan works before you go ahead and apply for it with your spouse. There are a few distinct elements about it which need to be understood and prepared for in advance to prevent avoidable issues from coming up later. Here’s all you need to know.
How Much Amount Can Be Borrowed?
One of the first things to know when seeking out a joint home equity loan is how much loan you can request from the lending institution. This depends upon a number of factors such as:
- The Amount of equity that you own in the house. This number is determined by assessing how much of the principal amount of your mortgage you have paid up along with the current value of the house. This value can vary depending upon the prevailing market conditions. In case the house value has dropped since your purchase, the equity can be adversely impacted as well.
- The joint income of the household. If both spouses are working, and both are co-signing the home equity loan application, then both their incomes will be taken into account and calculated to assess their eligibility.
- Credit history and scores are another important factor that can determine how much loan you can secure. The credit history and scores of both the spouses will be taken into account. This can be beneficial in lifting the score in case one spouse has poor history and score, thereby enabling them to get better terms.
- The joint debt-to-income ratio of the household would also be assessed. This is evaluated by assessing how much income is being pulled into the household and how much of it is being used towards the payment of existing debts.
Property Valuation
In order to ensure transparency and accuracy, the majority of lenders will prefer to have the property value appraised by a qualified and neutral professional. This will help ascertain how much equity the applicants hold in the house, and determine how much loan they can get.
Pros and Cons of a Joint Home Loan For Married Couples
As a general rule, most lenders recommend that borrowers not get more than 80% of their equity value in loan amount.
Interest Rates
A key component to securing any kind of loan is the rate of interest that you are offered for its repayment. In the case of a joint home equity loan, assessing what the best potential rate of interest is which can be offered to a couple, their creditworthiness needs to be assessed. For this, the financial status and stability of both people is assessed. A critical evaluation of their credit scores and histories is also conducted.
The results of these inspections lead the lenders to determine what is the best rate of interest which they can offer. If the financial standing of one spouse is much better than the other, it can be used to improve the terms which are being offered.
Repayments
Since for a joint home equity loan both the spouses sign in the same capacity as the other, they are both equally liable for the repayment as well. In case the borrowers start missing payments or default on the loan, the lender can reach out to both to try and recoup the loan. Failure to repay the loan by the borrowers can lead the lenders to initiate foreclosure proceedings by which they will gain possession of the collateral.
Conclusion
A joint home equity loan is a useful financial option for couples. Through this, a married couple can improve the equity loan terms and conditions for themselves if their joint application happens to be stronger than the individual application. However, when taking this loan, lenders should compare a few lenders to choose one who offers the best terms.
