Posted: 1 May '23

What You Need to Know Before Considering Equity Lending

What You Need to Know Before Considering Equity Lending

There are many ways of raising capital or securing loans to grow your business, pay debts or settle large bills. These loans can either be secured or unsecured. As a homeowner, you can use your home equity as collateral to borrow a loan, which you can use to pay bills, invest, or consolidate other debts. Compared to unsecured loans such as credit cards, signatures, and payday loans, home equity loans are more flexible and incur lower interest rates. We have discussed what home equity lending is and what to consider before obtaining one.  Call us today to discuss your options!

Understanding Home Equity Lending 

Home equity lending is a type of asset financing where homeowners use their home equity to secure a loan. Home equity refers to the property’s current value minus any liens or outstanding mortgage balances. For example, if your home’s current value is $900,000, but you have an outstanding primary mortgage of $300,000, the equity in the property is $600,000.

There are three main types of home equity lending: home equity loan, HELOC, and cash-out refinance, or home equity line of credit. With home equity loans, you get a lump-sum amount to be repaid over a fixed period. Cash-out refinancing allows you to get a larger mortgage to pay off the existing mortgage before cashing out the remaining amount. On the other hand, HELOC allows you to borrow up to a given limit and only repay interest monthly, with the principal amount payable in full at the end of the loan period.

Banks and other lending institutions typically lend a given percentage of the equity you have in your home. This is determined using a combined loan-to-value ratio (CLTV) of 80 to 85%. The exact CLTV your lender, will give depends on factors such as your credit score and overall financial strength.

Things to Keep in Mind 

Before applying for a home equity loan, there are a lot of factors you must keep in mind. First, you need to understand the benefits and cons of home equity lending. For example, it is an easier, faster, and more affordable way of securing a loan. However, taking on a second mortgage without a clear repayment strategy increases the risk of foreclosure. Here are the other things to consider before choosing a home equity loan:

  • Your future plans. Weigh the risks and costs of applying for the loan and consider your plans for the property. Do you have plans to sell the property in the future? What are your options if you default?
  • The purpose of the loan. Ensure you have a prudent way of using the money and repaying it within the stipulated time. 
  • Your home value and outstanding mortgage. It only makes sense to consider home equity lending if you have substantial equity in your property. 
  • The loan cost. Always consider the costs associated with the loan, such as the origination fee, closing costs, interest rates, etc. Compare the rates and fees from one lender to another before making up your mind.

Get Started Today 

Home equity lending is one of the best ways to source financing for personal or entrepreneurial use. Understanding how the loan works and what to expect from your lender is key to deciding what works for you and what doesn’t. Do thorough research and choose a reliable lender to guide you through the home equity lending process. Call BMC Mortgage & Investments today!