Home equity loans are attracting a lot of attention from people who need finances for diverse purposes. Homeowners who have gathered some equity in their homes can avail the advantages of a home equity loan, by getting cash in return for the equity they own in the house. This can be extremely advantageous for them as it provides lump sum funds to them, without any restrictions on how the money can be used. But how much home equity loan can one get? Let’s find out.
How Do Home Equity Loans Work
Home equity loans are granted to borrowers who own a home and have some equity in the home. Home equity is based on the current market value of the home minus the amount of debt they have yet to pay on the first mortgage. Home equity loans are known as a secondary mortgage, and as such, these take into account how much of the first mortgage is still left to be paid.Â
So, for instance, if the house is worth $500,000, and the borrower owes $300,000 on their first mortgage, the amount of equity they hold is $500,000 minus $300,000 which equals $200,000. The $200,000 home equity is used to determine what amount of home equity loan the borrower can receive.
To come up with this value, the house is appraised to get its current value. In case the value of the house has gone down since you purchased it, the loan might not come at very favorable terms.
For instance, assume that you purchased the house at $500,000, but since then, its value has gone down to $400,000. You have already paid $200,000 to the first mortgage. So, when calculating your equity in the house, the calculation would be with regards to the current value of the home rather than its initial value. So, in this case, the equity will be $400,000 minus $300,000 which equals $100,000.
Now, when the home equity loan amount which can be provided to you, will be based on this $100,000 limit.
Expenses To Consider
Applying for a home equity loan can come with a few expenses in the form of charges and fees which you may want to consider before applying for the loan. However, it must be remembered that these charges and fees can vary among different lenders, so it is essential to find out about them in advance.
A home equity loan requires the appraised value of the house, so there may be charges associated with house appraisal services. Moreover, there may be charges such as application fees, late payment penalties, prepayment penalties, fees for loan processing, recording fees, etc.
The policies for each of these can be different for every lender even to the extent of whether or not they want to charge the fees at all or not.
The terms for the payment of these charges can also vary. Borrowers can pay these fees in cash upfront, or even deduct this value from the loan being disbursed to them.
How Much Home Equity Loan Can A Borrower Take
When trying to get a home equity loan, there is an upper limit to the amount of loan which a borrower can get. Based upon the combined loan-to-value ratio for each borrower, the exact limit of the loan amount is determined by the lenders for every borrower. In general, lenders do not offer a loan amount that exceeds 80% of the total home value a borrower owns. Some lenders may extend this limit to 85%.
So, assuming that your home is worth $500,000 dollars, but you do not owe anything (all your mortgage is paid up), you own complete equity of the property. In this case, the value will be 80% of $500,000, which will be $400,000.
However, in case you owe $300,000 to the first mortgage that you had taken towards the purchase of the house, then that amount will be deducted from the 80% limit. In this case, $300,000 will be deducted from $400,000, which will leave you with a $100,000 home equity loan limit.
Did you know that in addition to a maximum value or limit to the home equity loan amount a borrower can get, there is also a minimum limit for it? Yes, you read that right. Home equity loan lenders also have baseline limits to how much loan a borrower can ask for.
In general, lenders are typically unwilling to provide any home equity loan for sums lower than $35,000 to $40,000. However, some lenders may bring this limit down to $10,000 as well based on their personal policies or choice according to the borrower’s circumstances. As such, people who need smaller loans, should find alternatives to a home equity loan.
Alternatives To Home Equity Loan
Depending upon the unique needs of the borrower, a home equity loan might not always be the best option. For example, if the borrower needs to loan a very small sum, they can opt for a different type of loan such as a personal loan.
These loans are provided for small loan amounts and are easily accessible and quickly processed as well. A personal loan is also unsecured, which means that the borrower does not risk losing their home. If you are looking to borrow small amounts under $10,000 or whatever minimum limit the lender has decided upon, then this may be the most ideally suited loan option for you.
Conclusion
Home equity loans are very low risk loans which a homeowner can opt for in case they require funds for any purpose. This loan is like a second mortgage they get on their home and it can be availed at any time, whether they are still paying off the first mortgage, or are still paying it off. However, when choosing a home equity loan, borrowers should pay attention to whether or not they have positive equity in the house or not to make a wise decision.
