Your house is the most valuable asset you own. If you bought it with a mortgage (which is the case with most homeowners), you accepted a favorable long-term loan with interest of only a few percent. But from the very moment you started paying off the mortgage, you actually started building home equity.

Home equity is the value of your house that you have already paid off through the mortgage (more details on how to get the best mortgage rates are explained here). With a simple calculation of subtracting the remaining mortgage amount from the current market value of your home, you get the amount of equity. 

Quite often, it’s worth more than what you’ve paid off so far, which is logical because real estate prices are rising. That allows you to put your house’s value to good use if you need to borrow money. Simply put, you can apply for a home equity loan. This arrangement is like a second mortgage since it’s also long-term and secured with your property.

Loan Requirements

You can speed up equity building by putting more money into mortgage repayments or doing house upgrades and renovations. All this raises the market value of your house, which means you’ll build a substantial equity at some point.

Most lenders allow you to apply only when your equity reaches 20%, although some allow even 15%. And since you probably put a down payment when buying a house in the amount of 20% of its value, you actually already have that much equity at the very start. And with every new installment repaid, you increase it. 

This loan is secured, but lenders don’t approve it for everyone. In fact, most of them have special requirements for borrowers, such as a credit score not lower than 650, DTI below 43%, and a steady job (or other regular source of income) in the previous two years. Not meeting these conditions doesn’t mean you’ll automatically be rejected for this loan, but the lending terms won’t be very favorable.

Types of Home Equity Loans

There are two common ways you can tap your home equity. The first is an “ordinary” loan, which the lender approves as a lump sum (usually no more than 80% of the equity) to spend as you wish. Interest rates on these arrangements are mostly fixed, and the repayment period ranges from five to 30 years.

If you decide to use this loan to refinance your mortgage, you can visit billigeforbrukslån.no/lån-med-sikkerhet, apply for the exact amount you need or ask for extra cash. The latter is known as cash-in financing because it allows you to pay off the mortgage and still have enough money for repairs, upgrades, etc.

Another way to use the value of your home and get money is the so-called HELOC or home equity line of credit. It’s a revolving line of credit, the amount you receive every month during a certain period, usually five to 10 years. It’s a drawing period, and over that time, you pay only interest, which is variable.

After the drawing period, you start repaying the money in installments. During the repayment period, you return the principal plus interest. As in the previous case, you are free to use the HELOC as you wish, but it’s best to have justified reasons – debt consolidation, paying off high-interest loans, covering major life expenses, building an emergency fund, or pumping up your savings.

When to Get a Home Equity Loan

Borrowing against your home equity gives you the chance to use your house as collateral once again and get another loan. What you will do with that cash is your choice, although there are several valid ways in which most borrowers spend this money.

It is most logical to apply for this loan as a type of refinancing of the first mortgage. This can bring many benefits if the new deal has a shorter term, enables faster repayment, and carries a low interest rate. This can happen if you seize a favorable market moment and lock your interest with a new, fixed-rate loan.

Another option is to use this lump sum to buy another house, vacation home, or any other property. This is perhaps the best thing to do when you have substantial equity to get enough money to purchase another property in cash. But it’s not a good idea to use that money as a down payment for another mortgage.

You can also use the money from tapping into home equity to start a business, invest, renovate your house, etc. There are no restrictions, but there is a common-sense logic telling you not to waste this money but to spend it wisely. 

But if you have cash left over after refinancing your mortgage, you can go on a vacation or treat yourself to something you’ve wanted for a long time. As long as you can repay this loan on time, there are no problems.

How to Apply for a Home Equity Loan

Once you assess your home equity and decide to use it as collateral for a new loan, you have to find a trustworthy lender to process your application. Take your time to research the market and find the one that offers the best lending terms. 

Then, hire an appraiser to give you the exact equity value. Prepare the required documents, fill out the form, and submit your application. After applying, most lenders take between two and six weeks to process your application and get back to you. This may take some time if you use the home equity loan to refinance the mortgage due to the closing costs and the procedure that goes along with all of that.

A home equity loan gives you a lot of chances to use your house’s value for various purposes. Use it wisely to enjoy the most benefits. But before applying, have a solid repayment plan and meet the lender’s requirements to avoid any financial trouble down the road.