Want to know how much your home equity loan payments might be in the future? Getting a good, honest sense of your monthly payments on your home equity loan is a critical factor for your short- and long-term financial future. Knowing exactly how much you’ll pay helps to set budgets, determine future plans, and much more.
So, what exactly goes into that “magic formula” for your home equity loan payments? It can be confusing to figure out – especially for those new to the process. Have no fear; LemonBrew is here to help. In this blog, we’ll go over the basics of a home equity loan and talk about all of the different factors that play into these monthly payments.
What is a Home Equity Loan?
Before we get into the basics of home equity loan payments, let’s tackle one of the big questions: what is a home equity loan?
A home equity loan takes advantage of one of your most valuable assets – your home itself – in order to deliver the homeowner a sizable chunk of cash. You might not think about it, but the equity in your home is extremely valuable. If a person does need a cash infusion for some type of immediate need – like medical bills, college payments, or something similar – home equity lines are one way to do it.
However, a home equity loan is definitely not for everyone – and it’s something that will definitely vary from person to person. Before you start in with your home equity loan, it’s essential to know all of the factors that might make up your eventual home equity loan payments.
Let’s dive into those in the next section.
There’s a “secret mixture” of elements that go into calculating your home equity loan payments every month. These are certainly not something most homeowners consider after all the closing costs come set. However, they’re certainly important in your long-term financial planning.
Here are the important home equity loan payment factors:
- First and foremost, you’ll need to have a handle on the value of your home. This is essential when it comes to calculating exactly how much equity that it will provide. If you’re thinking about getting a home equity loan, it’s not a bad idea to schedule a home appraisal or work the home equity loan around an already-scheduled one. Getting a handle on how much your home is worth is an essential part of the future calculations; remember, home values can fluctuate, so sometimes it’s better to wait for a more fertile value period before you apply for a home equity loan.
- The second element that must get considered is the state of the mortgage. All of the loan amounts will depend on this specific number (or percentage of the mortgage). You’ll need to have made a pretty good dent in paying off the mortgage before you can get a home equity loan for your property. For example, if you’ve just bought your house and have just started making payments, there is little chance you’ll get approval for a home equity loan. The further along you are in paying off the mortgage, however, the more likely you are to get approved – and there will also be plenty of money available for the home equity loan. There’s no one number that equals a magical dividing line, but anywhere from 20-25% is usually a good starting point.
- The third element that comes into play? The borrower’s credit score. Those in the homeownership game know just how critical someone’s credit score is to establishing someone’s future; a high credit score attracts the (positive) attention of lenders for a good credit line. A low credit score, and there’s not much of a chance of getting a good deal on this type of credit. As a result? Those with poor credit (usually around or below the score of 620) generally will not be eligible for home equity loans. Be sure to get a good handle on your credit score before starting the home equity loan process; if your credit is poor, work to improve it before applying.
- The fourth element is the amount of the home equity loan that you are eligible for. This will require a bit of math and something called a “combined loan-to-value” ratio. A lender will examine all of those factors above – how much you owe on the house and how much the mortgage is, along with the existing credit score – and calculate a loan-to-value ratio. That percentage determines if you can have a home equity loan payment at all, and how much the total payment is.
- Next, there is the interest rate on the home equity loan. Hopefully, you’ll be able to find a good prime rate loan, and the rates will be relatively low for the payoff. Be sure to shop around to find the best rate possible.
- Finally, there are the logistical details of the home equity loan. How long is the repayment period? That time – after the “draw period” when the money comes out – will determine how many months you have to pay off the loan balances.
There is another option when it comes to home equity loans that you need to know about. Home Equity Lines of Credit (also known as HELOCs) operate under the same principle as home equity loans – but with a different result. Home equity loans distribute all of their money at the front with a fixed rate of interest. HELOCs feature a variable rate of interest, and borrowers can take money out in smaller loan amounts (akin to how a credit card operates).
Just like a home equity loan, home equity lines of credit are not for everyone – and the amounts you will make on your monthly payments can vary due to the interest rates and a host of other factors. Make sure you carefully consider every option before getting either a home equity loan or a home equity line of credit.
Have more questions about anything related to home equity loan payments – or anything else real estate-related? LemonBrew is here to help. From questions about the prime rate, loan term, variable rate, home equity lines to all the products and services a new homeowner needs, LemonBrew is the perfect resource for everything real estate.
One more thing anyone interested in real estate should check out: the LemonBrew real estate blog. Have any questions about real estate? You’ll be able to find in-depth information on the industry’s most pressing issues in this comprehensive, detailed blog. Explore articles like “How do Real Estate Referral Fees Work?” and “The Best Real Estate Agents Know These 4 Things,” along with “5 Ways to Manage Your Finances During an Uncertain Time” and “How Long Does it Take to Close on a House?” Come see what the blog has to offer!