Home & Real Estate

What You Need to Know Before Applying for a Home Equity Loan

A home equity loan is a debt secured by your home’s value. It usually offers lower interest rates and longer terms than many consumer loans, but there are a few things to consider before applying.

Your credit score heavily influences your eligibility for a home equity loan or line of credit. Your chances of approval increase if your credit score is at least 620.


How Much Can You Borrow?

Before applying for a home equity loans Cleveland Ohio, knowing how much you can borrow is essential. This will depend on various factors, including your debt-to-income ratio (DTI), credit score and the lender you choose.

Most lenders require that you have at least 15% to 20% equity in your home, but some will allow you to borrow up to 90% of your home’s value.

Like a bank account, a home equity line of credit (HELOC) enables you to borrow a set amount over time with your house as security.

A home equity loan, also known as a HELOC, can cover significant expenses like renovations, education fees, unanticipated medical costs, etc. But be sure to research offers and lenders to locate the best one before applying for a home equity loan. This will enable you to maximize the value of your home equity and steer clear of typical errors.

Interest Rates

Interest rates are among the most important factors when deciding how much to borrow. They can also affect how quickly you can access the funds.

You may use the equity in your house as security for a home equity loan, a form of second mortgage. It may be used for various things, such as debt relief, educational expenses, and home repair tasks.

To access your money as required without paying interest on the total amount, you can also take up a home equity line of credit or HELOC. Yet, HELOCs frequently feature variable interest rates that might alter based on the state of the market.

Ultimately, the best interest rates on a home equity loan or HELOC are found when shopping with several lenders. This will ensure you get the best rate for your financial profile.

Tax Deductibility

Home equity loans and lines of credit can turn the equity you’ve built in your house into cash. They’re also a tax-deductible way to pay for home improvements or repairs.

Before you file your taxes, look at your mortgage interest statement (Form 1098) and call your lender to learn more about your deductions.

The Internal Revenue Service has specific rules regarding when and how to deduct interest on a home equity loan. In general, you can only claim this deduction if you used the money for buying, building or substantially improving your primary residence.

This tax break is available through 2026 and is a great way to help reduce your taxable income. However, the IRS changed its rules about writing off interest on these loans in 2017, which could make claiming this deduction more challenging.

Closing Costs

Closing costs are one of the most significant upfront expenses you can incur when buying a home. They usually run 3% to 5% of the loan amount.

You can find out what closing costs are expected to be by reading your lender’s loan estimate form. It should be clearly outlined with all fees explained.

The loan estimate should also explain any special fees that may apply, such as a title search or flood certification. These can vary from lender to lender, so compare estimates.

Closing costs can drag your borrowing power, but ways to minimize them exist. Look for loans with no fees or closing costs, take advantage of lender discounts and only borrow what you need. If you reduce your closing costs, that could significantly lower your overall monthly payments. Make it a point to shop around and ask lenders to detail their fees so you can negotiate them whenever possible.