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How to Qualify for a Home Equity Loan

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Buying a house is an investment, one that can open opportunities in numerous areas of your life. Not only does it become a home for you and your family, you can also borrow money against the property, creating financial flexibility for a wide range of goals.You can access that flexibility is through a home equity loan (HEL) or home equity line of credit (HELOC).

When you take out a home equity loan, you receive a lump sum that you repay at a fixed interest rate.

With a home equity line of credit, you’re approved to borrow a certain amount, but you don’t need to use it all right away.

If you’re approved for $100,000, you might borrow in increments of $15,000 or $20,000, depending on your needs. Unlike HELs, HELOCs typically come with adjustable interest rates, though there are variations in the product terms you’ll want to compare to ensure you’re getting the best deal for your circumstances.

What it takes to qualify for a home equity loan

There are three key factors that impact your chances of being approved for a HEL or HELOC.

Decent credit. The first is your credit score. Because some lenders are more conservative than others, each will have different credit thresholds for approval.

“Getting a home equity is very similar to getting a mortgage,” Kelly Kockos, senior vice president in home equity product management at Wells Fargo, told MagnifyMoney. Borrowers will likely need at least fair to good credit to qualify for a home equity product, she says.

Substantial equity. The second element that needs to be in place is your available equity, which is determined by your existing mortgage balance and the total value of your home. If you’re approved for a loan or line of credit, the lender will decide how much of your equity you can borrow against. Depending how their products are structured, they may allow you to borrow up to 85% of your available equity. Most lenders won’t go above 85%, according to the Federal Trade Commission.

Tendayi Kapfidze, chief economist at LendingTree, says a good rule of thumb is to have a loan-to-value ratio that’s well below 80% before applying for a home equity product (Disclosure: LendingTree is the parent company of MagnifyMoney). He suggests that if a home is worth $100,000, a mortgage balance of $50,000 would be a healthy ratio for taking out a home equity loan or line of credit. Assuming a lender allows you to borrow up to 80% of your home value and that you meet all other criteria, you might be approved for up to $30,000 to use as you see fit.

Kapfidze says the percentage for which you’ll be approved depends on the lender’s criteria and the relationship you have with them. If you hold other assets with them, they may feel comfortable offering a higher loan or line of credit, he says. But regardless of where you apply, equity below 80% will provide enough of a gap between your remaining mortgage and your home’s value to borrow the money you need.

Low debt. Finally, lenders will take your debt-to-income ratio into account. As with other credit decisions, they’ll look at how much you pay each month on your mortgage, student loans, car payments and credit cards, Kockos says. Keeping these as low as possible will boost your chances of approval because a high debt-to-income ratio may raise red flags about your ability to manage another significant payment.

“If your debt is over 43% of your income, then it’s probably not a good thing for you to take on more debt,” Kockos said.

The benefits of home equity loans and lines of credit

Both HELs and HELOCs provide access to funds and offer a means to cover important expenses.

Kapfidze says that because home equity products are backed by your house as collateral, you’ll often secure better interest rates than you would through a personal loan or credit card. That’s why some consumers will use home equity to purchase cars or pay off student loans, because they’re able to secure better interest rates that way.

Whether you choose a home equity loan or line of credit depends on your particular circumstances.

Depending on how you use your loan, you may qualify for a tax deduction. You may choose to limit your home equity spending based on new tax limitations as well. The Tax Cuts and Jobs Act stipulates that you can only deduct interest paid on a home equity loan or line of credit if you use the funds to renovate, build or purchase the house that secures the loan, according to the IRS.

Who home equity loans are best for: Kockos says that home equity loans make sense for consumers who know they need a set amount of cash right away. If you’re facing a major expense with a set dollar amount — a medical procedure or a roof replacement, for instance — you may want to take out a loan for the exact amount you want to borrow. You can then lock it in at a fixed interest rate and you’ll know what your monthly payments will be for the duration of the loan.

Who HELOCs are best for: A home equity line of credit may make more sense if you want access to a certain amount of money but don’t necessarily want to use it all immediately. Unlike with an HEL, you’ll only pay on what you’ve already drawn from a HELOC. Kockos offers the example of using a HELOC to cover home remodeling expenses. You might be approved for $100,000 but you may not pay all of your contractors at once. Instead, you might pay $25,000 to one vendor this month and $10,000 to another next month. If that’s the case, you’d use your credit line as each expense comes up, and you only pay interest on the funds you’ve already drawn.

David Gorman, a division executive at Bank of America, says a home equity line of credit has become increasingly popular among both lenders and borrowers. “You very rarely see home equity loans anymore,” he said.

He attributes this shift to the flexibility of HELOCs. Even consumers who want to lock in a fixed rate can do so on their lines of credit, he explains. If you spend $30,000 of an $80,000 line of credit on roof repairs, you can lock in that $30,000 at a fixed rate to avoid significant interest increases during repayment. This provides some of the security of a home equity loan without sacrificing the benefits of the HELOC.

“It acts almost the same, and they don’t have to take it all out upfront,” Gorman said. “It provides you significant flexibility.”

The risks of home equity loans

The number one risk you must be aware of when you apply for a home equity product is that you’re borrowing against your home, and your lender can foreclose on it if you don’t make your payments.

“You’re risking your house, whereas with other types of loans, you may pay a higher interest rate but you’re not putting your house ‘on the line,’” Kapfidze said. Consumers should be well aware of that risk when applying for a home equity product, he added, but if they go into it with a full understanding of the terms, they’ll find that they are likely to get the best rates through these options.

Knowing that your house is at stake makes it vitally important to think carefully about how you spend your home equity funds. You can use the money however you choose, whether that’s to repair your basement after a flood or take a second honeymoon. However, paying for nonessential renovations or family vacations leaves you with less money to cover emergencies, not to mention with potentially significant debt that could become difficult to repay. Gorman says that Bank of America doesn’t advise borrowers on how to spend their money, but he says that misuse of funds is one of the biggest pitfalls that ensnare consumers.

“Should they actually need the equity in their house for other things down the road, they may no longer have it,” he said.

Shopping for a home equity loan

Look beyond the interest rate. The obvious comparison point when comparing HEL and HELOC offers is the interest rate. However, there are several other factors to consider as well. One is the fee — how much is the lender charging on top of your monthly interest payment? Another is whether there are rate caps in place to protect you against future interest rate spikes. Kockos recommends looking at annual and lifetime rate caps to determine which offers provide the best protection features throughout the life of the loan.

Compare flexibility. Kockos also suggests comparing product flexibility among HELOCs. Some lenders will offer lock and unlock features for their home equity lines of credit. This allows you to secure a portion of your spending at current interest rates but unlock it later if rates drop and you want to secure those instead. If your lender offers a lock and unlock option, be sure to ask how many times a year you’re allowed to use that feature so you’ll know how agile you can be based on rate volatility. Kockos notes that some lenders will offer promotions or discounts on fixed-rate home equity loans, so it’s worth inquiring about those as well.

Consider closing costs. Jorge Davila, vice president of sales, consumer direct and digital mortgage lending at Flagstar Bank, says it’s important to compare post-closing services as well. He recommends comparing when and how you’ll be able to access funds, whether there are mobile management options and whether there are prepayment penalties for your loan or line of credit. Factoring in servicing features along with rates and protections will give you a full picture of what you can expect from working with a lender.

What to do if you don’t qualify for home equity products

From a lender’s perspective, issuing a home equity loan or line of credit is riskier than giving someone a mortgage. Kapfidze explains that the mortgage lender has the first lien, meaning that they’ll be repaid first if you default on your loans. Because the home equity lender has the second lien and therefore carries more risk, their approval thresholds are likely higher. This means that your chances of qualifying for a home equity product may be lower.

However, if you still need access to a large sum of money, you may qualify for a cash-out refinance. In this case, you would refinance your current mortgage for a higher dollar amount that includes the remaining balance on the loan plus additional funds you can use for renovations and other needs. The difference between the two is what’s available for spending. Kapfidze notes that consumers can see higher interest rates on their refinanced mortgages than on their existing mortgages, so it’s important to be aware of the additional costs you’ll incur before pursuing this option.

Making the right home equity decision

The first step in applying for a home equity loan or line of credit is meeting with lenders. They can explain the qualification process so you’ll know exactly what to expect. But you’ll also want to dig into the specifics of their offers and get a sense of what it will be like to work with them. As with a mortgage, you may be repaying this loan over decades, so you want to make sure their terms and support options work for your needs. The right lender can help you determine how much to borrow and how to maximize the opportunities associated with home equity borrowing.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Casey Hynes
Casey Hynes |

Casey Hynes is a writer at MagnifyMoney. You can email Casey here

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Mortgage

How to Host a Successful Garage Sale

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Whether you’re prepping for a move or finally cleaning out the basement, decluttering your home can bring you peace of mind — and extra cash. Hosting a garage sale is a great way to get rid of old or unused items. Here are a few tips to help you make your sale as profitable as possible.

When is the right time for a garage sale?

Garage sales go by many names — yard sale, moving sale, tag sale, estate sale or rummage sale — but some portion of the event will likely take place outside. If you’re hosting your sale to get rid of stuff before a move, you’ll likely be stuck to a certain date, but if you have some flexibility, consider mild seasons like spring or fall. No one likes rummaging through old items in the blazing August sun, even for good deals.

How to prepare for a yard sale

While the concept of a garage sale is fairly simple, it’s easy to mess up. Many people who host a sale see little success — often because they failed to prepare. Sure, you can just set your unwanted items out on the lawn and have passersby stop and quickly sift through everything. But when you put in a little work ahead of time, the success of your sale is much greater.

“The more preparation that you can do, the more you’ll probably make,” said Ava Seavey, New York-based garage sale expert and author of Ava’s Guide to Garage Sale Gold.

Schedule wisely. First, you’ll want to pick a day for your sale, ideally a Friday or Saturday.  Then you’ll want to take the time to sort through your belongings and carefully select the items you want to sell, choosing items that people will actually find appealing and will want to buy.

Be strategic about prices. Seavey advised that costume jewelry, furniture and collectibles have the potential to make sellers the most money. However, how you price the items is key to ensuring you will earn what these items are worth.

“A good percentage of people who go to garage sales will pay what you have written down,” Seavey said. While some people will negotiate, if your stuff is priced correctly, people will pay it, she said.

Get the word out. You will also want to focus on advertising your sale in your local newspaper and online using garage sale-specific websites and social media channels. Go ahead and describe the types of items you’ll have for sale to attract the right customers.

Be prepared. You’ll want to make sure you have all the supplies you need, including:

  1. Tables
  2. Tablecloths
  3. Pricing labels
  4. Money apron (to hold cash)
  5. Bags
  6. Paper/newspaper (to wrap fragile items)
  7. Signs (to advertise the sale throughout the neighborhood)
  8. Notebook/ledger (to keep track of items sold and money collected)

This may seem like a lot to do in order to sell a few necklaces, purses or electronics. But this preparation can make your sale more appealing and profitable. If having your own sale sounds too time consuming to prepare, you and a friend, family member or neighbor could have the sale together.

What to expect during your garage sale

On the day of the garage sale, you’ll get a variety of customers depending on what you have available for purchase. If you have advertised correctly and have the right things for sale, you could draw in a large crowd.

“I would have plenty of things for everyone. Those are the best sales, when you have a variety,” Seavey said.

Try to keep the sale going from the morning to the late afternoon. Having a sale that lasts a few hours may hinder your ability to make money because you are limiting how many people will be able to come. If your sale starts in the morning and goes until later in afternoon, you can maximize the profits from the sale because those who could not make it during the morning hours can shop in the afternoon before the sale ends.

“There is no magic time to end, but you will do most of your selling in the morning,” Seavey said. “I like to go as long as I can.”

With the money you make from your sale, you can add to or start an emergency fund, pay past-due bills, or even purchase updated items for your new home if you are moving.

What to do after the yard sale

A successful yard sale will leave a lot of money in your pocket and very few unsold items on your lawn. Consider storing your newly acquired cash in an online savings account that earns you interest. If you’re stuck with leftover items, you can always hold another sale, or you can donate them to a charity, church or secondhand store. You won’t make any money when you go this route, but there are benefits to donating.

“You have unloaded everything, you’ve made some money and you have a tax write-off,” Seavey said. “It’s a win-win-win for everybody.”

A garage sale can be the answer when you want to rid yourself of unwanted items — and even make a little money in the process.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Kristina Byas
Kristina Byas |

Kristina Byas is a writer at MagnifyMoney. You can email Kristina here

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What the End of HARP Means for Your Mortgage

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Home values have been on the mend since the financial meltdown of just a decade ago. This has been good news for people who have struggled with negative equity in their homes, meaning the value is lower than the amount they owe on their mortgage.

The percentage of “underwater” homes has dropped significantly, decreasing 16% year over year at the end of 2018 to comprise 4.1% of all mortgaged properties, real estate research firm CoreLogic found. But that means there are still homeowners who need assistance with recovering their equity.A popular government-sponsored refinancing program aimed at helping these homeowners has recently ended, and people looking for help getting above water may not be aware of the other options they have.

In this article, we highlight and explain what the closing of HARP means for homeowners and several available alternatives.

What is HARP?

The Home Affordable Refinance Program, known as HARP for short, is an initiative that helped underwater homeowners refinance their mortgage. The program was introduced in 2009 after the housing crisis.

HARP allowed eligible homeowners to refinance their mortgages to lower their mortgage interest rate or switch from an adjustable-rate to a fixed-rate mortgage even if they were underwater. Typically, lenders will not allow a borrower to refinance if the house is worth less than what is owed.

In order to qualify, homeowners needed to meet the following requirements:

  • No late mortgage payments over the last six months that were 30-plus days behind, and no more than one late payment over the last year.
  • The mortgage you’re attempting to refinance must be for your primary residence, a one-unit second home or a one- to four-unit investment property.
  • Your mortgage must be owned by Fannie Mae or Freddie Mac.
  • Your mortgage was originated on or before May 31, 2009.
  • Your loan-to-value ratio is more than 80%.

The program had been extended a few times, but the last HARP deadline was Dec. 31, 2018.

Fannie and Freddie’s HARP replacements

Government-sponsored enterprises Fannie Mae and Freddie Mac have refinance products in place that are meant to replace HARP.

Fannie Mae’s High Loan-to-Value Refinance Option

Beginning on Nov. 1, 2018, Fannie Mae has offered a high loan-to-value refinance option to borrowers with mortgages owned by the government-sponsored entity. The product is meant to make refinancing possible for borrowers who are maintaining on-time mortgage payments but have an LTV ratio that exceeds the amount allowed for standard refinance options.

Borrowers must benefit from the refinance through a reduction in their monthly principal and interest payment, a lower mortgage interest rate, shorter loan term or by switching to a fixed-rate mortgage. There is no maximum LTV ratio for fixed-rate mortgages; however, the maximum LTV for adjustable-rate mortgages is 105%.

The eligibility requirements include:

  • The loan being refinanced must be an existing Fannie Mae-owned mortgage.
  • The loan must have been originated on or after Oct. 1, 2017.
  • At least 15 months must pass between the loan origination of the existing mortgage and the refinanced mortgage.
  • Borrowers must be current on their mortgage, have no late payments over the last six months and only one 30-day delinquency over the last 12 months. Delinquencies longer than 30 days aren’t permitted.
  • The existing mortgage can’t be a Fannie Mae DU Refi Plus or Fannie Mae Refi Plus mortgage.

Freddie Mac’s Enhanced Relief Refinance Mortgage

Freddie Mac offers the Enhanced Relief Refinance mortgage to borrowers who are current on their mortgage but can’t qualify for a standard refinance because of a high LTV ratio. The mortgage being refinanced must meet the following requirements:

  • The mortgage must be owned or securitized by Freddie Mac.
  • The mortgage can’t have any 30-day delinquencies over the past six months and only one 30-day delinquency in the last year.
  • The closing date for the mortgage was on or after Oct. 1, 2017.
  • The mortgage can’t already be a Relief Refinance mortgage.
  • There should be at least 15 months between when the original loan was closed and the refinanced loan’s origination.
  • The loan can’t be subject to an outstanding repurchase request.
  • The maximum loan-to-value ratio for adjustable-rate mortgages is 105% and there’s no max for fixed-rate mortgages.

Borrower benefits include a lower interest rate, switching from an adjustable-rate to fixed-rate mortgage, shorter mortgage term or lower monthly principal and interest payment.

Alternatives to refinancing when you’re underwater

If refinancing your mortgage doesn’t sound like the best move for you, consider one of the following alternatives.

Mortgage modification

A mortgage modification is a way to change the original terms of your loan without going through the refinancing process. In some cases, you can work with your lender to switch from an adjustable-rate to a fixed-rate mortgage, extend your loan term, lower your interest rate or add past-due amounts to your unpaid principal balance.

Modifying a mortgage could be beneficial for homeowners facing hardship who aren’t eligible to refinance and are delinquent on their mortgage payments or expect they will eventually fall behind.

Mortgage recasting

If you have a lump sum of at least $5,000 in cash, you could potentially recast your mortgage. A mortgage recasting results in lower monthly mortgage payments. You pay a lump sum of cash to your lender to reduce your outstanding loan principal amount, then your loan is reamortized based on the lower remaining principal balance. Your interest rate and loan term stay the same.

This option makes sense if you’re expecting a bonus from your employer, a large income tax refund or some other financial windfall.

The bottom line

Although HARP has come to an end, there are still options for mortgage borrowers with Fannie- or Freddie-owned loans. In order to qualify for the enterprises’ refinancing programs, it’s helpful to maintain on-time payments even when your loan amount exceeds your home’s value.

If you don’t qualify, be sure to strategize on how best to attack your mortgage balance and rebuild equity. Consider making extra mortgage payments whenever possible by freeing up room in your budget, earning extra income or dedicating unexpected money to your mission.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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