DALLAS, TX (Covering Katy News) – A combination of record-high home values and the highest mortgage rates seen in decades has Texans tapping into their home equity to pay for renovations and consolidate debts.
Market conditions mean home equity has become a tremendous source of hidden wealth for many families.
"Homeowners have amassed nearly $30 trillion in home equity," according to the St. Louis Federal Reserve.
Home equity loans allow homeowners to borrow against their property's value to access large sums of cash at a fixed rate, and the loans do not change the rate of a homeowner's primary mortgage.
"If you've seen your home value increase over the last few years, your available equity has increased as well, meaning you could potentially qualify for a larger loan," said
Brent Sheffield, President and CEO of Advancial Federal Credit Union.
"Some people might be confused since it is called a ‘home equity’ loan, but you can use those funds for anything you need," Sheffield said.
Typical uses for home equity loans:
- Home improvements
- Debt consolidation
- College tuition
- Starting a business
- Emergency cash
"It's best to speak with a trusted financial institution like Advancial, so you'll get what you need and what works best for you," Sheffield said.
Pros and Cons of Home Equity Loans
A home equity loan offers lower interest rates than a personal loan because your home is collateral, but if you default, the bank will have a claim on your home.
Still, there are tax advantages to a home equity loan.
"Any interest paid on a home equity loan may be tax deductible, but it's always best to consult a tax professional to confirm those details and review your options," said Yolanda Martinez, Advancial's Katy branch manager.
Personal loans don't have closing costs, but home equity loans do have closing costs.
"Similar to a mortgage loan, home equity loans also have closing costs attached to them, though they aren't necessarily as much as what you'd pay for closing on your actual mortgage," Martinez said. "Whereas closing costs for a mortgage can average around 2 to 5 percent, they are typically only around 1 percent for a home equity loan, since the total loan amount is smaller and there are fewer fees overall. Be sure to ask your lender for an estimate beforehand so you aren't surprised by the cost."
Home Equity Loans are Flexible
Most home equity loan terms start at five years. However, some lenders provide terms of up to 30 years.
"The most important thing to consider is how much you can spend on monthly payments," Martinez said. "If you can pay more every month, a shorter term may be more beneficial. A longer term might be more appropriate if you'd prefer lower monthly payments."
Financial institutions often provide financial calculators on their websites to help you determine your loan payments.
Here is What You'll Need to Qualify
Homeowners will need 15 to 20 percent home equity to qualify for a home equity loan. Most lenders require a good credit score of around 670 or better. Lenders will also examine the debt-to-income (DTI) ratio, loan-to-value (LTV) ratio, total loan amount, and other factors.
A Final Question for Your Lender
Many homeowners hope to pay off their loans early, so always ask if there is a penalty for an early payoff.
Advancial Federal Credit Union is a Covering Katy News sponsor.
"Be sure to do your homework and look for a lender like Advancial to avoid unnecessary fees," Martinez said.
Advancial Federal Credit Union is a Covering Katy Sponsor.