Considering your home as an investment is more than just a metaphorical term. This is because the property you plan to purchase will have an important impact on expanding your financial options. The better you can understand a property’s impact on your economic opportunities, the more careful you’ll be in making crucial financial decisions.
Whenever real estate is concerned, people usually attribute mortgages and home equity loans to its financing. While the two may seem interchangeable, each has its own contribution to your property’s potential value.
Understanding the Value of Mortgages
Mortgages are loans you apply for before purchasing a home, which homebuyers usually achieve by signing up with a lender. For the application process, you need to provide several documents to prove your credibility as a borrower. Some documents a lender will ask are the following:
- Credit score
- Debt-to-income (DTI) ratio
- Proof of employment
- Financial statements
- Initial down payment (dependent on the property value)
Different lending entities will have varying benchmarks on what constitutes passes as a requirement. For example, some banks may only allow borrowers to access a specific loan type if they have a credit score of 650 and above. Even if an applicant has an impressive credit score, other factors can also contribute to a refusal.
The most common mortgage you can get is a 30-year or 15-year fixed-rate loan, but there are shorter terms and adjustable rates your mortgage lender can offer.
Breaking Down Home Equity Loans
Unlike mortgages, a home equity loan is a value you can take out of your mortgage even if you’re still paying for that debt. For example, you can use a home equity loan to borrow money from your home’s accumulated equity. Since your mortgage payments appreciate over time, you can use it to tap into a potential financial solution.
Keep in mind that you can only take out around 85 percent of your home’s equity. Additionally, your lender still has to look at your current credit profile and other variables before you get approval.
Instead of checking your credibility as a borrower, lenders will review the potential value of your home. If your home is a primary residence or an investment property, the amount of equity you can borrow may be reduced.
Comparing Mortgages and Home Equity Loans
Borrowing money from a lender will always come with heavy consequences if you cannot commit to repayments. Although home equity loans may seem like a straightforward loan based on your current progress of paying off your mortgage, there’s a vital risk with home equity loans. If you’re unable to pay off your home equity loan, you’ll be putting your home’s ownership as collateral.
Additionally, both home equity loans and mortgages have a strict application process. While the home equity loan process is faster, you’ll still need to consider the long-term impact of tapping into your home’s equity. For one, it could substantially increase your mortgage’s repayment period by having another loan on top of your current mortgage.
If you play your cards right, you can use a home equity loan for a more favorable mortgage through refinancing. However, this is a precise strategy that will require the guidance of a mortgage expert. Attempting to make your own computations and projections without the help of experts can lead to a more disastrous financial situation. This is why you should get a second opinion from a reliable mortgage company before committing to any changes to your mortgage.
There’s no substitute for getting reliable advice from real estate experts. At Liberty Mortgage, our team can guide you on the pros and cons of your prospective home financing options. If you’re looking for a reliable mortgage broker in Liberty, CO, contact us at (720)-818-8000 today!