If you own a home, there are many reasons to consider taking out a home equity loan: consolidating debt, investing in your home and yourself, or buying an investment property. However, it is important to understand what kind of loan will work best for your situation.
Look at Your Credit Report
A credit report is a record of the information that creditors have on you. It shows how well you’ve paid off your debts and whether or not you’ve been sued by creditors for not paying them back. You’re entitled to one free copy of each of these reports every 12 months–and it’s important that you check for errors in them before applying for any new loans or lines of credit.
Evaluate Your Debt-To-Income Ratio
The next thing to consider is your debt-to-income ratio says Charles Kirkland. Your debt-to-income ratio is the percentage of your monthly income that you spend on all of your debts, including your mortgage. If it’s too high, you may not be able to qualify for a home equity loan.
The good news is that many lenders will allow you to refinance or consolidate other loans into one new loan with better rates and terms–which can help lower this number so that it falls within acceptable limits.
Understand What Your Home Loan Options Are
When you’re considering a home equity loan, it’s important to understand the different types of loans that are available. There are two main types: a line of credit and a second mortgage. A line of credit works like an overdraft account for your house–you can withdraw money as needed, but there is no fixed term or repayment schedule.
Charles Kirkland It’s typically easier to get approved for lines of credit than second mortgages because they don’t require collateral other than your home itself (and sometimes not even that). However, since there’s no set amount you’ll pay back each month, it may be harder to budget for your monthly payments if they fluctuate from month-to-month based on how much money was withdrawn from the line during each period when bills were due last year versus this year; additionally, interest rates tend to be higher since lenders assume borrowers won’t pay off their entire balance every month.
