How to Get a Home Equity Loan

If you have owned your home for several years, you may have built up some equity. Homes purchased closer to the 2008 financial collapse may have little equity, but if you have owned your home for 10 or more years, then you likely have some equity in your home. That equity can be tapped to pay for some major improvements or cover smaller projects such as new fixtures, a refreshed kitchen or new floors. Read on and we’ll take a look at some steps you can take to get a home equity loan.

1. Determine your project. Establish the parameters of your project first. Make a list of things you want to have done and contact contractors to solicit bids. Your borrowing costs should equal the cost of the project plus 10 percent to account for overruns. Even if you’re eligible to borrow more, resist the temptation to take on excess debt.

2. Assemble your paperwork. Even before you apply for a loan, lenders will want to see some documentation. Most of the paperwork will be needed before the loan is approved and will include your recent pay stubs, tax forms and other income information. Gather what you can now and the rest once your loan is tentatively approved.

3. Search for a lender. You do not have to use your current mortgage provider to service your equity loan. Contact 3-4 financial institutions and choose one with favorable rates and terms to make your application. Lenders do not need to be local either — search online for a lender that is willing to service your loan.

4. Consider your lending options. Your lender may ask if you prefer a line of credit or a home equity loan. Both tap your home’s equity, but with a line of credit you withdraw your money as needed. With an equity loan you get one lump sum. Determine the right course of action for your needs.

5. Read your contract. One you are accepted for a loan, you’ll want to carefully read the terms and conditions to determine if the contract is right for you. You may want to consult with your financial advisor or an attorney before moving forward. Know what your monthly payments will be and understand that those payments will be on top of your current mortgage.

6. Sign your contract. When you’re ready to move forward, sign your contract and receive the funds or your line of credit. Keep these funds separate from your other account to track your spending habits.

Keep in mind that with a line of credit you don’t have to use the entire amount. Funds left over can be maintained for other projects or for an emergency. With a home equity loan, if you have cash left over, you can save that money for an emergency too or apply the funds to your upcoming monthly equity loan payments.

See Also — 7 Steps to a Home Improvement Loan

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