A Layman’s Guide to Home Equity Loans

Outlining the clear benefits and risks for property investment beginners

By Heather Sanchez

Home equity loans are secured loans that require your home be put up as the collateral security. As a person who’s been involved in real estate investing for many years, I’ve used them to personally finance the renovations in order to flip and sell a property, as well as to secure a home equity loan on one property in order to finance the purchase of another property.

There are a many benefits to home equity loans over other loans, for instance:

• Home equity loans are advantageous for both the consumer and lender

—there is little risk to both as long as you can pay the monthly loan amount, and lenders feel secure because your home asset is the collateral

For this reason lenders are more flexible about the terms and conditions because of the loan’s secure nature

The home owners can utilize the home equity loan for any purpose they want—for example, to pay off personal debt, debt consolidation, home renovations, and even to pay medical bills

The monthly repayment on a home equity loan tends to be cheaper

Credit score aren’t as highly considered for the securing a home equity loan due to the fact that the security of your home is the risk

Most home equity loans are quick to process—approximately 5 business days to secure. The way a home equity loan is structured is also advantageous compared to other loans. Due to the fact that these are fixed loans, the repayment period tends to be longer (i.e., 10 years to 30—depending on the loan amount), and most lenders will offer the maximum amount due to the fact that they can garner more profit from it. You will be granted a home equity loan based on your current mortgage, meaning the loan amount is based on both the volume of the equity you owe in the home (or the outstanding in the mortgage) as well as the current market value of your home. Usually an assessment of your home is necessary in the loan approval stages. 

To secure a home equity loan with a lender

• Fill out a home equity loan application with your bank or financial institution
• You must provide proof of home ownership—via a title search
• As well as the current equity in the home (this is often done with a drive by assessment) as well as based on the type of home you own—obviously a single-family home would garner a larger loan amount than say a condominium or modular home
  
• You must provide proof of employment via pay-stubs or a letter of employment from your current employer, the last years of income tax statements can also be used as testimony
• All of this information is used to judge your debt to income ratio (or your ability to pay back the loan).

The risk of a home equity loan

For the home owner, the obvious risk to an equity loan is your ability to make the repayments each month, on time. If you fail to do so, the bank will repossess your home.

About The Author

Heather is a staff writer for Lifestyles Unlimited where she has been involved in Houston real estate investing for several years. She enjoys analyzing investment trends, laws, and practices while at the same time debunking any myths she may find. As the owner of multiple rental properties and “flipped” houses, Heather believes that Real Estate Investors help put money back into the North American economy.