You can get a home equity loan for any reason, but the reason may determine how much you get and how much you pay for it. The following are four examples of reasons you may want a home equity loan.
1. You get a loan in order to add a room to your home. The room addition will increase your home’s value. For this reason, you can get a loan of up to 125% of the current value of your home. These loans are available as FHA, VA, or conventional loans from banks and credit unions.
2. The purpose of the loan is for your child’s college tuition. There is financing available specifically for this purpose. You may be able to get a lower-than-usual interest rate.
3. You want to pay off existing debt, such as high-interest credit cards. Because paying off this debt will give you a higher credit score, your interest rate and fees may be slightly lower than if you are borrowing to increase your debt. These are risky loans if you run up your credit cards again. If you do not have the discipline to start using your credit cards wisely, this is a bad loan.
4. You are borrowing money to travel or make a purchase, such as furniture. You are simply creating debt. This is usually a bad reason to borrow. Once the trip is over or the furniture starts looking shabby or outdated, you are still going to be paying on the home equity loan. You will not get any break on interest rates or fees for this loan. As with any loan, your credit and debt ratios will be a factor in determining interest rates and fees. Another factor will be the real estate market. When home prices are rising and interest rates are falling, lenders are understandably anxious to make mortgage loans. Because they feel that the risk is low, they may offer loans that have a much higher loan-to-value ratio, such as 90%, 95%, or even 100%.
Lenders set their own policies. When home prices are falling and interest rates are rising, lenders not only want higher rates and fees, but they also want higher credit scores and lower debt ratios as well.