Equity loan questions answered

By Justin Hunter

Equity is referred to as the amount of money left over after you subtract your current home’s value from the original purchase price. The amount of equity you have is important in many real estate aspects, especially when attempting to take out a loan on it.

While there are many reasons to apply for an equity loan, your lender must consider his or her risk before allowing you to borrow. The more equity you have in your home, the less risk the lender will likely encounter.

James Ellison’s article, “How to Determine Your Equity Value and Costs on Loans” posted on ezinearticles.com, provides some insider tips as to how your lender will evaluate the risk and thus price of lending you money from your equity.

“The expression equity value is sometimes used synonymously with the full equity of a certain home loan. If homeowners look at equity loans, the lender will weigh the equity built in the house. If the home is not worth the sum of money applied for, the homeowner will pay higher rates of interest and higher mortgage payments.”

This equates to a higher risk to lend because it shows that your home has actually lost value since you purchased it.

“However, the equity is controlled by current market value and value of the home to determine the chances.”

In case you are wondering, first-time buyers can receive just about any kind of loan an existing home-owner can receive but are considered risky because they do not have any home equity until the closing is final.

As a result, first time buyers seeking a home loan will be analyzed by their credit history, job, age, sex and geographical location in which they reside. Outstanding credit will definitely improve a first time buyer’s chance for approval.

Existing home owners will be greatly judged on their home equity by lenders before offering a specific loan program and terms.

“If the lender states that your home has negative equity, you may wish to ask an appraiser to test the homes value to substantiate that the lender is practical. If negative equity does exist due to structural damage, termites, or other damage to the house, you may want to think about a different sum of money to borrow.”

Keep in mind that if you have negative equity due to a recent sharp decrease in your neighborhood’s market, let your lender know about this and something can probably be worked out.

How do you determine how much of a home equity loan you could qualify for?
Lenders will sometimes determine how much you can borrow depending on 100 percent of your basic income plus other reported expenditures.

“Many lenders will provide high multiples and a loan, getting at 4 times the basic income. Some lenders will give as much as 5 times the basic income, considering the borrower's job. Despite the offers, homebuyers should think about their income carefully to decide if they can pay off the debts.”

It is very important to think about your monthly income when receiving any loan, especially a home equity loan since you are basically borrowing from your own home. Many people want to qualify for as much as possible but if you cannot afford it, you could end up going bankrupt or lose your home.

“If you get an equity loan, you must see that the loan is meant to payoff your first mortgage and then begin payment on the pending loan. Lenders ask borrowers in most cases to pay 5% to 10% down payment, as a source of guarantee. The larger sum of the down payment will reduce your interest rates and mortgage payments in most cases.”

The main thing to consider with home equity loans is that the lender will probably allow you to borrow more than you could on your first loan because the existing value of your home is collateral.

Do not borrow more than you can handle because you will not only ruin your credit but will also put the ownership of your home in jeopardy.

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