Adulting can get pretty expensive. Whether you’re trying to fund a major renovation, pay off a debt with high interest, or cover a college tuition, sometimes your savings are just not enough.
That’s where a home equity loan can help. It lets you borrow money against the value of your home without having to sell it.
Before you get excited and jump straight into it, there are a few things you should know.
Here’s how to make the process smoother and faster:
Know What a Home Equity Loan Actually Is
Let’s start with the basics. Before you apply for a home equity loan, you need to know what a home equity loan is.
A home equity loan lets you borrow a lump sum against the equity that you’ve built up in your home. Unlike a HELOC (Home Equity Line of Credit), this isn’t a credit card situation – home equity loan is one big payout with fixed monthly payments and a fixed interest rate.
Check Your Equity
To qualify for the loan, you’ll need enough home equity to work with. Most lenders want to see that you’ve got at least 15% equity in the home.
That means your mortgage balance should be well below your home’s current market value.
How do you get an idea of your equity, you ask? You can get a rough estimate by using online home value tools, but don’t skip a formal appraisal when the time comes.
Get Your Finances in Fighting Shape
Before you apply for the loan, take a good and hard look at your financial situation.
Here’s what lenders are usually focused on:
- Credit score. Aim for 620+, but 700+ gives you better rates.
- Debt-to-income ratio (DTI). Keep it under 43%.
- Reliable income. You’ll need to show that you’ve got the cash flow to repay what you want to borrow.
If your credit score is too low or your DTI is too high, spend a few months cleaning things up before applying.
Shop Around and Take Your Time
All lenders are not the same. Interest rates, fees, and terms can vary a lot from one to the next.
Don’t just walk into your usual bank and sign whatever they hand you. Instead, compare offers from at least 3 to 5 lenders, including credit unions and online lenders.
Make sure you ask about their:
- Interest rates
- Loan terms
- Closing costs
- Penalties for early repayment
A little comparison can save you a lot of regret later.
Don’t Over-Borrow Just Because You Can
Sure, a lender might offer you a big loan. But just because you can borrow $80,000 doesn’t mean you should.
Always borrow based on what you need and what you can afford to repay comfortably, not just the maximum you qualify for.
Ask yourself this: Will I still be comfortable with this monthly payment if the AC breaks or I need a root canal next month?
If the answer isn’t an immediate or confident yes, scale back.
Read the Fine Print
Seriously. Even if it’s boring.
Home equity loan contracts are full of details that you don’t want to ignore – like closing costs and hidden fees.
If anything sounds confusing or fishy, ask questions. And if you’re still unsure, run it by a financial advisor or someone you trust before signing.
