How Much Equity Do You Need To Get A Home Equity Loan For Remodeling
If your home is in serious need of major renovations, you may be thinking about getting a home equity loan to use to pay for the remodeling that is needed. Before you rush into this, you should understand that your home must have equity in it in order to qualify for a home equity loan, and here are a few important things you should know.
Most Lenders Will Only Issue Loans Up To 80% Of Value
The most important factor you should know about home equity loans is that most lenders will not issue these loans for amounts that exceed 80% of a home's value. For example, if you owe $160,000 on your house that is worth $200,000, you owe 80% of the value. In this case, you may have problems getting a home equity loan.
On the other hand, if you only owe $120,000 on this house, you may be able to take out $40,000 through a home equity loan, because this would put you right at the 80% mark.
There are ways around this though. For example, you could look into a piggyback loan. This is a high-risk type of loan that you can get in the form of a home equity loan. You will pay a higher interest rate on a piggyback loan compared to a regular type of home equity loan.
Ask Lender If Home Can Be Appraised Afterwards
If you do not have a lot of extra equity in your home but really want to make the much-needed improvements, you might have another option, but you will need to determine if the improvements will cause the value of your house to increase. If so, you might have enough equity in the house to use for the improvements.
To use this option, the lender must agree to complete an appraisal of the house after the improvements are made. If this appraisal is much higher than the initial appraisal, you may still be at or below the 80% mark even after paying for the improvements.
For example, assume your home is currently worth $200,000 and needs $20,000 of work done. If you owe $160,000 on the house now and borrow $20,000 in the form of a home equity loan, your house would need to appraise for $225,000 when the work is complete to stay within the 80% limit. 80% of $225,000 is $180,000, which equals the current amount you owe plus the extra money you need for the work.
Making improvements to a home can be expensive, which is why a lot of people turn to home equity loans. If you would like to learn more about these types of loans, contact a lender (such as New Horizons Credit Union).