All You Need to Know About Home Equity Loans

Home Equity LoansAs you pay down your first mortgage or the value of your home increases, you develop equity. When you have equity built up in your home, borrowing against it with a home equity loan is a great way to tap into the money when you need it most. Many people take out a home equity loan to finance home improvements, pay for their child’s college education, cover unforeseen medical costs, and many other purposes. Here’s all you need to know about home equity loans.

What is a home equity loan? 

A home equity loan (HEL), or second mortgage, is a secured loan that allows homeowners to borrow against the equity in their home. The loan amount is based on the difference between the home’s current market value and the homeowner’s outstanding mortgage balance. Home equity loans tend to be fixed-rate, while the typical alternative, home equity lines of credit (HELOCs), generally have variable rates and allow the borrower to withdraw funds as needed.

How is a home equity loan amount determined?  

Your primary mortgage is the amount you borrowed when you first purchased your home. Over time, as you pay down the loan and/or the value of your residence increases, so does your equity. You can take a home equity loan out against the equity you have built up in your home, essentially borrowing against your home’s value minus what you still owe on your mortgage. It’s important to note that a home equity loan is a second loan against your home. You’ll still need to pay your primary mortgage along with new payments for your home equity loan.

A lender will typically want you to have at least an 80 percent loan-to-value (LTV) ratio once your home equity loan has been approved.

Interest rates on home equity loans 

Home equity loans typically have a fixed interest rate, making budgeting for the payments easy. The lender provides a lump sum payment to the borrower, which is then repaid over the life of the loan, along with a set interest rate. Both the monthly payment and interest rate will remain the same over the entire loan term, which can last anywhere from 5 to 30 years. If the borrower sells the home before the loan term is matured, the loan must then be repaid in full.

A home equity loan can be a great choice for a borrower with a one-time or straightforward cash need such as a home addition, large medical expenses, debt consolidation, or a wedding.

Are there any costs associated with home equity loans?

As with mortgage loans, there are closing costs associated with home equity loans. Closing costs refer to any fees incurred when originating, writing, closing, or recording a loan. These fees include application, appraisal, title search, attorney fees, and points. Some lenders may advertise no-fee home equity loans which require no cash at closing, but these will usually have other associated costs or a higher interest rate which can easily offset any gains.

What are the pros and cons of a home equity loan?

There are several advantages to taking out a home equity loan to fund a home improvement project or a large expense:

  • The amount of interest paid toward a home equity loan may be tax-deductible.
  • Interest rates on HELs are generally lower than those provided by credit cards or unsecured loans.

Home equity loans do have some disadvantages as well:

  • Using your home as collateral for the loan means risking foreclosure and the loss of your home if you default on the loan.
  • If your home value declines over the term of the loan, you may end up owing more than your home is worth.
  • You’ll need to pay closing costs and other fees when you take out a home equity loan.
  • You may qualify to borrow more than you actually need and ultimately end up using more than planned, which of course you’ll need to repay.

The hot real estate market has led to a boom in popularity for home equity loans. However, it’s important to weigh all factors carefully before determining if a home equity loan is best for your specific needs.

Freedom has Home Equity Loans and Home Equity Lines of Credit available.  Visit freedomfcu.org/personal/home-loans/ for more details. 

Your Turn: Do you have questions or advice about home equity loans?  Talk to us on Facebook, LinkedIn,Twitter, or Instagram @FreedomFedCU.

 

The Ultimate Guide to Applying for a Business Loan

Business Loans

If your business has reached a point where it needs an infusion of funds in order to grow, you may be in the market for a business loan. A business loan can help a struggling small business establish itself better, or help a thriving company expand its line of products, open an additional location, move to a larger site, hire new team members or purchase expensive equipment.

Here’s all you need to know about applying for a business loan:

Make sure your credit is in order

Before applying for a business loan, check your personal and business credit health.

A personal credit score is measured in the hundreds, with scores ranging from 300-850. A score that falls from 580-669 is considered fair, 670-739 is good, 740-799 is very good, and 800-850 is considered exceptional. You can check your personal credit report once a year at no cost from AnnualCreditReport.com. Review your score for any inaccuracies or fraudulent charges and be sure to dispute these immediately through any of the credit bureau websites: ExperianEquifax or TransUnion.

Business credit scores are measured differently.

Experian uses Intelliscore Plus as its credit scoring model, with scores ranging between 1 and 100.

Equifax assigns each business three different scores: a payment index score, which assesses the company’s payment history with the score ranging between 0 and 100; a credit-risk score evaluating how likely it is the business will not meet on-time payments with the score ranging between 100 and 992; and a business failure score measuring how likely a business will fail, with the score ranging between 1,000 and 1,880.

Business credit scores are also measured by the Dun & Bradstreet Corporation. The D&B score range is 0 to 100 and the key factor it considers is the timeliness of payments made to previous creditors. In order to receive a D&B score, a business must file for a free DUNS number and information about the company’s borrowing habits must be provided by a minimum of four lenders or suppliers.

Finally, the FICO Small Business Scoring Service (SBSS) score ranges from 0 to 300 and considers variables, such as the business owner’s personal credit score, the company’s payment history, number of employees and the age of the business.

If your personal and/or business credit scores are low, work on improving your credit before applying for a loan by meeting your monthly payments on time and keeping credit utilization low.

Update your business plan

Be sure to have a fully crafted business plan to show a prospective lender before applying for a loan. The plan should include details about how the company intends to use the funds from the loan, the anticipated increase in revenue and plans for repaying the loan.

Consider arranging supplemental collateral

Lenders generally prefer to reduce the risk of a borrower defaulting on a loan by securing collateral for the loan. For business loans, this usually takes the form of the company’s accounts receivable, equipment or other valuable assets. The lender can seize the collateral if the business fails and the borrower cannot repay the loan.

When applying for a business loan, you can offer additional collateral to the lender, such as personal assets, like real estate or other valuables. This will make you more likely to qualify for the loan and may bring down the interest rate on your loan as well.

Organize your personal and business documents

You’ll need the following documents and identifying paperwork to apply for a business loan:

  • Photo ID
  • Accurate monthly financial statements from the past two years
  • Business license
  • Any commercial leases
  • Business insurance plans
  • Payroll records
  • Incorporation documents
  • Current financial obligations
  • 3 months of bank statements
  • Personal and business tax returns
  • Collateral, if required

Research potential lenders

It’s best to take some time researching potential lenders before applying for a loan. Learn about each lender’s eligibility criteria so you can anticipate whether or not you will qualify for a loan. Look up average loan interest rates for each lender, as well.

As you complete this step, choose a general source for your loan.

Startups may not qualify for a large loan and can be better off pursuing a microloan, or a small, short-term loan offered by a nonprofit lender. These loans can often be applied for online.

If you need a larger loan, consider applying for a business loan through a credit union. A credit union will offer you personalized service, looser qualifying criteria and a competitive interest rate that will help you keep more money in your business throughout the life of the loan.

Freedom FCU’s business loans offer generous terms and competitive rates. Call, click, or stop by today to apply.

Submit your application

Once you’ve gotten all of your paperwork in order and you’ve chosen a lender, you’re ready to apply for a loan. Depending on your lender, you may be able to begin and/or complete the application process online. Be patient; loans can take anywhere from one day to several months from application to funding. With luck, you’ll soon have the funds you need to take your business to the next level.

About Freedom Federal Credit Union

Freedom serves and is open to anyone who lives, works, worships, attends school, volunteers, or has family in Harford or Baltimore County, MD. As a credit union, we are committed to putting you first, not shareholders, and helping you achieve your financial goals. Learn more at freedomfcu.org or call us 800-440-4120 to see how we can help.

Your Turn: What are your best tips for taking out a business loan?  Tell us about it on Facebook, Twitter, or Instagram. @FreedomFedCU