How do Home Equity Loans Work

Your home could generate cash, but not without stipulations.

Home equity loans were once a staple method for home owners to access a sizable chunk of cash. But that was then, this is now, and it's not as easy to tap into your home's equity as it once was.

The good news is that with home values on a steady rise, more people have the most fundamental of requirements in hand. That's a higher value than what's owed, and the trend has been improving for a while.

Have you ever thought about getting a home equity loan? Here's what you can expect in this new financial era.

What Exactly is a Home Equity Loan

The more you pay toward your mortgage, the less you owe. That much is probably clear. In time, if you never sell your home, you will eventually own it free and clear. But in between point A, which is buying, and point B, which is owning it outright, you gain more and more equity in the home. That means the value of your house, or your asset, is worth more than what you owe on it.

The difference between what you owe and what the house is worth is your equity. And when the stars align (and you have excellent credit), you can cash out that equity and use it for anything from home improvement to paying for your kids' college tuition.

Another option is a cash-out refi, which refinances the original loan plus more. The amount financed pays off the original loan, says Truth About Mortgage, and the remainder goes to you.

Expect to jump through a lot of hoops, but it's all for good cause.

What Home Owners Need to Qualify

Just the existence of home equity isn't enough anymore, says Bankrate. Home owners need high value, low debt on the house, a great credit score plus a low debt-to-income ratio. That's a powerful package, and one that would enable almost anyone to acquire any loan, not just of the home equity variety.

Home equity loans require at least 15 percent equity, which Bankrate explains translates to a loan-to-value (LTV) ratio of about 85 percent. But there's more. Your total debt is analyzed, as well as your credit history.

If you have 45 percent debt-to-income and have 75 percent or less mortgage LTV, you'll need a credit score of at least 700. The minimum score varies based on LTV and debt-to-income ratios.

With luck and good money management on your side, you could free up cash for anything, including your retirement.

Why it's Tougher Now Than Before

Obtaining credit anywhere isn't as easy as it once was. And in many ways, that's a good thing. In the not too distant past, lenders financed almost anyone for mortgages, but people with poorer credit only qualified under outrageous interest rates.

When the economy started to circle the drain, those were the unfortunate people hit hardest. Many found themselves in foreclosure. But it affected the whole industry, which is only now starting to really recover.

Because fewer refis are happening, there are a lot more eyes on your paperwork. It's no longer pushed through as quickly as possible. Now, it's under intense scrutiny. And Bankrate explains that with the new mortgage rules from 2014, requirements for consumer ability to repay is more challenging to meet.

Home equity loans, cash-out refis and even home equity lines of credit still exist, and they're starting to gain a little more ground than in the last decade. Many lenders are shy about lending, but some do still offer services to home owners who qualify.

If your credit is in tip top shape and you've got a healthy amount of equity, you're more likely to qualify for a home equity loan. But how can you know where your equity stands? That's the easy part.

At eppraisal, we offer a property value estimation service that can show what your home is worth. If you're thinking about cashing in on your equity, click here for your free property valuation today.