Posted: 1 Aug '22

How Does Equity Lending Work?

How Does Equity Lending Work?

If you are a homeowner, chances are, you have heard of home equity lending. Whether you are running short of cash or going through tough financial times, it's possible to secure a fixed-interest loan using your home or own property as collateral. In other words, home equity lending allows you to use the equity you've built on your home to secure a loan. Your home equity simply refers to the difference between your home's current value and the amount you owe on your mortgage. Call us today to learn more.

What is Home Equity Lending and How to Qualify for It  

Home equity lending is a second mortgage loan that gives you access to a lump sum if you meet the lending requirements. Second mortgages are available to homeowners who want to take a second loan against their home equity while still repaying the first mortgage. You can choose to take the second mortgage from your first lender or a different lender with better rates.

Since equity lending is a second mortgage, the rates are slightly higher than those offered by first mortgage lenders. Your home equity should be 20% or higher to qualify for this loan. Suppose your home is currently valued at $900,000 and you owe $400,000 on your mortgage, your home equity is $500,000 ($900,000 – $400,000). This represents 55.5% in home equity ($500,000 / $900,000*100). 

That said, most lenders will approve a home equity loan on not more than 80% of the home's value. In the above example, 80% of the current home value is $720,000. So the loan you can expect comes down to $320,000 or less, i.e., ($720,000 – $400,000). 

Additionally, most lenders prefer working with homeowners who meet their income requirements and don't have a significant debt load. An impressive credit score is an added advantage; however, some lenders do not prioritize this as such.

Benefits of Home Equity Loans

With equity lending, you'll get a fixed-interest loan, which you can repay like any other mortgage for a period of 15 - 30 years. One benefit of home equity loans is that you can use them to finance virtually any need, from debt consolidation, expanding your business, car repairs, home renovations, medical expenses, etc. 

Also, unlike the home equity line of credit (HELOC), where you have access to credit for an extended period, home equity loans are processed and paid out at once. You may also qualify for some tax deduction on the loan interest if you use it to fund specific home improvements such as installing energy-efficient systems or renovating for medical purposes.

Is it Right for You? 

Equity lending is a popular and easy option for homeowners who need a lot of cash to settle their bills, consolidate high-interest debts, or pay for home renovations. Since these loans run parallel to the first mortgage, they come with some risks. In case of a job loss or a significant life tragedy and you cannot make your mortgage payments, you could lose your home.

Considering your current needs and financial situation, you may seek professional advice from a mortgage professional. That way, you can evaluate if equity lending is right for you before choosing the best second mortgage lender in the market. Call BMC Mortgages & Investments today to discuss your options.