Home Equity Loans: 6 Things You Need To Know

Lots of people resort to mortgage programs to finally buy a house of their own. As you slowly repay your mortgage and your home value increases, you get to build your equity. However, home equity is money trapped unless you find a good idea to use it.

The good news is you can apply for a home equity loan, and if you get approved, you can use it to repair, maintain or improve your home, or even pay off existing debt. But before you go rushing in to apply for a home equity loan, here are eight things you need to know.

You Get to Loan a Lump Sum You Can Use for Various Purposes

One great thing about home equity loans is that you get to take advantage of your equity and have a lump sum that you can borrow multiple times once your loan is approved. You can use this for various home improvement projects or to pay off existing debt. You have control on when and how much money you’ll borrow while you make regular payments each month.

You Can Choose Between the Two Home Equity Loan Types

In Texas, a Mortgage Lender Midland will give you two home equity loan options. The first one is a Texas Cash Out wherein one needs to finish paying your first mortgage first before getting qualified. A HELOC, Home Equity Line or Home Equity Line of Credit, on the other hand, is a type of a second mortgage. Each has its own terms, conditions, requirements and maximum amount a lender can give to a borrower.

One of the Requirements of a Home Equity Loan is 85% or Less LTV Ratio

An LTV ratio or the Loan-To-Value ratio is a lending risk assessment used by mortgage lenders. Most lenders will require 85% or less LTV ratio. The higher the LTV ratio, the higher the risk thus if a lender did approve you for a home equity loan, chances are you’ll get higher loan costs, and you’ll also need to pay for mortgage insurance.

Home Equity Loan Interest Can be Tax Deductible

Borrowers get to deduct the interest of home equity loans only if you use it for home improvement projects. The home equity loan interest won’t be deductible if you’ll use it to pay off other debts like credit card, car loan or student loans.

Lenders Won’t Bother to Lend You Small Home Equity Loans

This type of loan is not useful for individuals who only want to borrow small amounts of cash. The maximum amount you can qualify for won’t exceed $750,000 but won’t be lesser than $10,000.

The Rates are Higher, and the Terms Can be Longer than Regular Home Loans

Home equity loans tend to have higher rates than your first or existing mortgage. While they do have lower interest rates, it can still change depending on the market conditions. Since you applied for a new mortgage, you knew terms can be longer to repay than your existing debts.

Good Read: The Most Important Factors that Affect Mortgage Rates


It’s best to understand home equity loans before you get one. Just like regular mortgages, home equity loans have repayment terms. This means you’ll need to pay your lender back with fixed monthly payments. While it can be easy to apply and get approved for an equity loan and you get potential tax benefits, the fees and a large amount of debt are two pitfalls you need to be wary of.