Home equity loans are a great financial product when you need money to pay down debt that has a higher interest rate, you want to remodel your home, or you need to buy a new car. However, you should be aware that there are some restrictions that come with borrowing against the equity in your home. If you have never looked into home equity loans before, here is some information on the restrictions you should expect to encounter.
Number of Years You Have Owned Your Home
Some lenders may require you to own your home for "x" number of years before you can borrow against any equity in it. That applies even if you bought your house outright, or bought a portion of it outright (e.g., you already paid 1/4, 1/2, 1/3, etc. when you bought the house). This restriction may exist to exclude people from borrowing against a house they just bought when they may not have any intentions of staying in it for very long. It also encourages home owners to reinvest their equity loans in their homes to make the homes more valuable.
Equity Loan Limit Is Equal to the Amount of Home You Actually Own
Since some people may own part of their home right off the bat, they may need to wait awhile to prove to the banks that they can make payments on an equity loan. Those that have built up equity the old-fashioned way by making numerous on-time mortgage payments until they have gradually secured ownership in part of the property will find that their equity loan still comes with limitations, the most important of which is the amount of the loan equalling the amount of home they have paid off. In very rare circumstances, a lender may offer you an equity loan that exceeds the amount of home you own (e.g., the value of your property has skyrocketed, making your payments by comparison look quite nice on paper).
Your Credit Score and Income
Like any other loan, your credit score and level of income are still important. This is another factor that may coincide with the restriction that homeowners have to live in their homes a certain number of years before applying for a home equity loan. If you were gifted a large chunk of money and that is how you were able to buy part of your house outright, but your credit is poor and your income limited, the lender may refuse your application until your credit gets better or income increases. Contact a business, such as Union State Bank, for more information.
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