Does a Home Equity Loan Make Sense for You?

As with any loan, it’s wise to consider the purpose of borrowing and to have a set plan for paying it back well before you sign your name on the agreement. When it comes to home loans, during your search process you’ll be advised on the loans that make the most sense for your needs. Undoubtedly, there’s a lot of information looming out there. Some of it good, some of it bad. You’ll come across a flurry of opinions and personal stories. While it’s important to have an open mind, it’s wise to understand that not all borrowers and lenders are one in the same. In other words, every situation is unique.

An example of how some home loans aren’t meant for everyone is the case with home equity loans. Home equity loans allow borrowers to use their home’s value as a means for a loan. This works for those whose home is worth more than they owe. Many consider a home equity loan like a second mortgage. Since there is some caution with this type of loan, let’s examine how it works. This will allow you to better decipher whether the loan makes sense for you.

First — A Breakdown: Understanding  How Home Equity Loans Work

Becoming a homeowner gives you additional financial opportunities. Once you’ve reached a good ratio of mortgage debt and your home’s market value, you will have home equity. Home equity is earned in two ways. The first method is through the mortgage payments you’ve made on your house and the second is the increase in your home’s market value since you first began paying your mortgage. To calculate what is known as the home equity line of credit (HELOC), you’ll need the following:

1. Your home’s fair market value

2. The mortgage balance for your house

3. Then, subtract the mortgage balance from the fair market value

4. This gives you the difference, which represents your home's potential equity

An example of this calculation would be, let’s say your home’s market value is $350,000 and your home’s mortgage debt is $200,000, that leaves you with a potential equity of $150,000.

Special Rules for Lenders

Home equity loans in El Paso, as well as those in the rest of Texas, have been designed to protect borrowers from any potential financial damage. As such, rules for borrowing have been implemented. Here are some of those rules:

• You can only take out one loan at a time. In Texas, the law does not allow for a borrower to take out more than one home equity loan for the same house, at the same time. Therefore, if you have an equity loan with an outstanding balance, you first need to pay off the loan in full. Another option is to refinance it into a new home equity loan. This rule applies no matter how low or high your home’s equity stands.

• Your debt cannot be higher than 80% of your home’s fair market value. What this means is that the most cash equity your house can provide is 80% of its fair market value. For example, $160,000 is the maximum equity a $200,000 house can yield. Here’s an of a home equity calculation:

• Home Market Value = $200,000

• 80% of Home Market Value = $160,000

• Home Mortgage Debt = $100,000

• Available Home Equity = $60,000

• You can only take out one home equity loan one time per calendar year. This includes any prior loan taken out that year, even if it has been paid off in full. If you anticipate this being an issue, you may want to consider a home equity line of credit (HELOC).

For Personalized Guidance, Contact My Home Loans in El Paso

Considering you’re spending the necessary time researching and gathering information, we have no doubt that you’re already on the path to success. To work with a trustworthy lender who can offer you personalized guidance, connect with My Home Loans today. We believe unique situations deserve unique care!