If you need money to cover the high cost of living, it may be wise to use the equity in your home. One way to do this is to get a home loan. In the following post, I will describe what this loan is, how it works and how you can qualify for your own loan. Read on to find out if this financial decision is right for you.
What is a mortgage?
A home loan is often called a second mortgage because it really is. It is a loan that allows you to take out loans against the value of your home. Often, this type of loan can be a way for homeowners to access large sums of money to pay for the high cost of living. It is not uncommon for a person to take out a mortgage to finance renovations, cover medical debts or help a child pay for his studies.
Home loans are often an attractive source of finance because they are available at lower interest rates than credit cards or personal loans. However, keep in mind that these low-interest rates pose a high risk. Lenders are happy to offer lower interest rates because these loans are secured by your home. This means that the lender can take out a mortgage if you stop making payments.
How it works
Simply put, home loans work like your first mortgage when you originally bought your home. The loan money is paid as a lump sum so that you can use it as you wish. Upon receipt, start with fixed monthly payments to pay off the loan. With each payment, you always pay part of the principal and interest. It should also be noted that home loans have fixed interest rates.
Qualify for a home loan
Again, qualifying for a home loan is very similar to qualifying for a first mortgage. Your lender would like proof of employment and records of your debts and assets. You should be prepared to bring the following documents with you when you visit your lender.
- Two years W-2 or income tax return if you are self-employed
- Your last salary receipt with your income from the previous year
- Account statements for all your bank accounts and assets
- Debt records for credit cards or other loans.
In addition to these documents, your lender will also look for more information. He or she will assess the capital you have in your home. (Remember equity is the percentage of your home that you own directly). Here, the amount of capital you have accumulated in your home helps determine how much money you can borrow. With most lenders, you can only borrow 85% of your assets.
The difference between a home equity loan and a home loan line
Home equity loans and home lines of credit are often confused. They are similar in that they both allow you to borrow against the value of your home, but they work very differently from each other. While a home equity loan works like a traditional mortgage, a home loan line works like a credit card. It gives you a period during which you can use the capital of your house according to your needs. Home equity lines of credit also have adjustable interest rates.