Is A Home Equity Loan Or Equity Line Of Credit Right for You?

Posted November 04 2017
by PenFed Your Money
Is A Home Equity Loan Or Equity Line Of Credit Right for You? - PenFed Your Money

When you need cash to cover a major expense or project, a home equity loan or home equity line of credit may be the right product for you. Home equity loans have long been the go-to of responsible homeowners who need money for things like home improvements, debt consolidation, education expenses, weddings, vacations or emergencies. A home equity loan lets you tap into the value of your home at a lower interest rate than most credit cards or personal loans.

Because lenders have to follow strict guidelines about a homeowner’s ability to repay a home equity loan, applicants must prove that they are financially sound. Some factors to consider are a strong credit score, a good debt-to-income ratio and sufficient equity in the home.

How do you know if you have enough equity in your home?

The loan to value ratio or LTV ratio is one of the numbers lenders review when determining eligibility. Your LTV ratio expresses the balance of your existing mortgage loan against the value of your home as a percentage.

Your LTV ratio is the amount of your mortgage divided by the current appraised value of your home. For example, if you owe $92,500 on a home currently appraised at $100,000, your LTV ratio is 92.5 percent, or 92,500 divided by 100,000. An LTV of 92.5 percent means you have 92.5 percent of your home’s value still left to repay. Another way of looking at it is that you hold about 7.5 percent equity in your home. The lower the LTV, the more equity in the home to borrow against.

The LTV requirements for home equity loans vary among financial institutions.

Affordable home equity loans

If you’re shopping for an affordable way to borrow money, a home equity loan or home equity line of credit lets you tap the value of your home to get access to competitive loans with lower interest rates. Is a home equity loan right for you? Come visit the PenFed Home Equity Center today to find out.