What is a Home Equity Loan and How Does it Work?
Home Equity Loans are a popular loan option due to their practicality. They can be a smart, accessible loan option for people who need to free up some cash to cover a home project and other life expenses. What are they and how do they work? Let’s dive right in.
The Basics of Home Equity Loans
A Home Equity Loan (HELOAN) is a loan that allows you to borrow against the value you’ve built in your house — i.e., equity. When you have equity in your home that means your home’s appraisal value is higher than the amount you still owe on your mortgage.
HELOANs are actually a second mortgage loan and are taken out as a lump sum of money. With a Home Equity Loan, your home is used as collateral. Home Equity Loans typically have a fixed interest rate for at least the first few years, then will transition to have an adjustable rate. Just like your original mortgage, you will make regular monthly payments on the loan.
How is a HELOAN different from a Home Equity Line of Credit?
Another Home Equity product option is a Home Equity Line of Credit (HELOC). This is similar to a HELOAN in the sense that it’s considered a second mortgage and you borrow directly from your home’s value. Instead of taking out a loan in a lump sum, however, a HELOC functions more like a credit card. They also tend to have an adjustable interest rate rather than a fixed rate.
Borrowers can withdraw funds as they need them—with a set credit limit—for a predetermined period of time. Great Midwest Bank HELOCs have a 10-year span. Interest is only paid on money that is taken out. HELOCs are often a great choice for borrowers who want more flexibility for projects with less clear-cut costs.
For example, maybe you want to remodel your bathroom but aren’t sure exactly how the costs will add up… or whether you want to install that jacuzzi or not. HELOCS can also serve as an option for covering unexpected expenses that might pop up in the future.
[Read more about the differences between a Home Equity Loan and a Home Equity Line of Credit.]
How to Use Home Equity Loans
HELOAN funds can be accessed in your banking account online or in person at a bank branch. You will be able to make withdrawals and transfers as needed. While people often use Home Equity Loans to help fund home projects, how the loan is used is completely up to the borrower.
Generally speaking, HELOANs are best for covering planned expenses for which you have a good expectation of how much funds you’ll need.
Some common uses for a HELOAN are:
- Funding home renovation projects
- Paying for big-ticket items
- Debt consolidation
Setting up a Home Equity Loan
At Great Midwest Bank, we make establishing a Home Equity Loan a straightforward process. You can apply online for the loan, or talk to a loan officer to get started.
When you apply for the HELOAN, you need to submit the past:
- 30 days of pay stubs
- 2 years of W2s
- 2 months of bank statements
- 2 years of federal tax returns (self-employed borrowers)
The amount of money you’re able to take out on the HELOAN will depend on your home’s value and your available equity. We’ll calculate your home’s value using a home appraisal. The appraisal factors in many things, including square footage of the home, size of the lot, condition of the home, and values of comparable properties in your area.
Our loan officers will help move the loan process along to get you to closing on the loan as soon as possible, keeping you informed every step of the way.
Should you pursue a Home Equity Loan?
If you qualify for a Home Equity Loan, it may be a great option to help you cover planned expenses in your life while making the most of the value you’ve worked to build in your house.
Remember, too, that a Home Equity Line of Credit may be another option for you. As mentioned, HELOCs are a terrific solution for many people if they want to free up some funds but are not sure exactly how much their upcoming life expenses will cost.
While we can’t guarantee every homeowner will qualify for a Home Equity Loan, we’ll help you explore it as an option. If a HELOAN is not the best option for you, an experienced GMB loan officer will evaluate all your lending options to see what might be a better solution for your needs.
Talk to a loan officer to learn more about how to set up a Home Equity Loan and get information about current rates.
Ready to tap into your home’s value?
If you’re interested in a Home Equity Loan or a Home Equity Line of Credit, we’re here to help. Stop by or give us a call to talk with one of our knowledgeable local loan officers at your neighborhood Great Midwest Bank. We firmly believe banking experiences shouldn’t be stressful for our customers. You’ll experience a state of Bankquility® when you find how easy the loan process is. We look forward to helping you with your loan needs!