Should You Get a Home Equity Loan?

Before you read any further — please understand that a home equity loan is an additional mortgage on your home, usually the second mortgage on your home.
 
Just like any other mortgage, if you default on the payments of a home equity loan, you can lose your house.
 
Home equity loans are not quite as popular as they have been in the past — for a simple reason. The reason being that homeowner’s equity in their homes has dwindled or disappeared, as home prices in the United States have taken a serious dive. In the UK, leading industry experts have warned about house prices being in peril.

You have equity in your home when the fair market value of your home exceeds your current mortgage balance.  Equity in your home does not just consist of your original down payment and the payments on your principal that you make every month.  In the past, rising home prices have been the main reason for the increase in the equity in your home.
 
When home prices were soaring, you could buy a home with no money down and like clockwork your house would go up in value — thus creating home equity.
 
Mortgage lenders were even willing to give you a mortgage for more than the cost of your house — with you putting the excess cash in your pocket.  And still, equity was created as home prices jumped past this greater than 100% mortgage.
 
Before home prices plummeted, it was very fashionable to use the equity in your home as a personal piggy bank or ATM.  It seemed like this endless supply of home equity cash would never end.
 
But alas, like all other good things, it did come to an end.

Do You Qualify For a Home Equity Loan?

You must determine the difference between you truly needing a home equity loan and simply just wanting a home equity loan. There is a big difference.
Legitimate reasons for needing a home equity loan could include paying off high interest credit cards; needed home improvements; college tuition costs; medical bills; and any other truly needed expenditure.
Wanting the home equity cash for frivolous reasons is simply not a good reason for putting your home in further jeopardy — realize that this is serious business.
In these times of scarce mortgage money, it will not be easy to qualify for a home equity loan.  The most important qualifying factor is: Do you have sufficient equity in your home?  It varies with each mortgage lender but you generally should have at least 20% or more equity built up in your home.

 
Homeowners tend to think that their home is worth more than it really is.  It doesn’t matter what you paid for your home or what it was once worth.  Your mortgage lender wants to know what value it is today.
 
If you have a very small amount of equity or if your house is “underwater” (mortgage more than fair market value), you won’t get a home equity loan.
 
You must also have a good credit history and credit score.  Your job history and income stability are also important. 

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