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Wondering if using home equity to pay off debt is a good idea? The answer is, it depends. Home equity loans let you, the homeowner, borrow against the equity you built up on your property. Lenders tout it as easy access to cash, offering low rates and attractive terms. If you have excellent credit and a stable monthly income, a home equity loan can be a good option. However, as with any secured loan, there are risks to consider.
How Does a Home Equity Loan Work?
A home equity loan allows you to tap into your home’s equity — the portion of the home you own, which is calculated by taking your home’s current value and subtracting it from your outstanding mortgage amount. Once you do close on a home equity loan, you’ll receive a lump sum of cash. Think of it as a personal loan, except you can typically borrow more money, and at lower rates. Similar to a first mortgage, you receive a loan at a fixed rate. Each monthly payment is the same and will lower your loan balance until it reaches zero — within your predetermined term. Simply having home equity doesn’t guarantee approval. Lenders typically have rigorous qualification requirements for home equity loans. This includes your credit score — most lenders require you to have at least 620 — proof of income and a debt to income ratio that’s less than 43%. This percentage represents your monthly gross income currently dedicated to paying off debt. You’ll also be subject to requirements on your property. Lenders typically want you to have at least 15% to 25% equity in your home. To determine your home’s current value and, therefore, the amount of equity you have, lenders will ask that you go through the home appraisal process (which you’ll pay for). Once approved, you can use the money towards anything you need — debt consolidation, credit cards, and medical bills.
What Can I Do If I Don’t Want A Home Equity Loan?
Most people think that the only way to tap into their home equity is to either take out a loan or sell their home and downsize. That’s not true. The real estate industry is continuously evolving, and programs like Arex FAST’s Home Equity Investment (HEI) are here to help. Instead of charging you interest rates and high monthly payments, we invest in a portion of your home’s future appreciation.You can receive up to $350,000. Since we share in the loss if your home value drops, you’re not at risk of being upside down as you would be with a home equity loan. In other words, you can free up your budget for what matters. Some things that have helped credit scores rise is paying down revolving lines below 30 percent utilization, having the extra monthly funds to pay all payments to creditors on time, clearing up unresolved delinquencies are all things that are possible when using your home equity in a traditional mortgage or with and HEI like Arex FAST offers.