Is a home equity loan your only way of getting a million dollars? I think not.
With rising expenses, people need loans to fund their businesses or for buying homes. Getting a million dollar loan has become really easy nowadays; since everything has become digitized and accessible, getting loans for small-scale businesses or mortgages is not a tough task anymore.
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What is a Home Equity Loan?
A home equity is the difference between the actual value of the property and the mortgage on it. It is basically how much of your home you actually own. That said, a home equity loan is a lump-sum amount where the borrower uses his home equity as collateral. This value is determined by the property’s value minus outstanding loans like mortgage. These loans are used for a one-time big payment like starting capital for a business or paying tuition fee etc.
There is always a lien attached with this kind of loan, which means that the lender can claim a small portion of your house when you sell it to compensate for the pending loans. The value of the equity loan is set as a percentage of the home’s appraised value like 75%.
Home Equity Loan Explained
With all the math involved, home equity loans can be confusing to understand. Let me give you a real-life home equity loan example of how it works.
Sally purchases a home worth $200,000. She makes a down payment of 20% and obtains a loan to cover the remaining $160,000. Now the home equity interest is 20% of the property value. Since the property is worth $200,000, she paid $40,000 from her own pocket (down payment). If you look at it this way, Sall officially owns just the $40,000 of the house.
She’s living in the house so technically she owns everything that’s there, but the house is being used as collateral for the loan.
Home equity increases when the home’s value increases. Assuming that the house market rises and the property’s value is now $400,000. Sally still owes the previously determined $160,000 but now she has a 60% equity stake. The loan balance will remain the same, but the equity increases due to the increase in the home’s value.
How much can you borrow on a Home Equity Loan?
Well, how much you can borrow solely depends on how much equity you have. As a general rule of thumb, lenders lend you money somewhere around 75%-90% of your available equity, depending on the lender, your credit and income too.
So if your home is worth $250,000 and your mortgage is $150,000, you have a home equity of $100,000. Of course you won’t be getting all of the $100,000, but an 80% of your home equity which will amount to $80,000. This is how the value of home equity determines how much you can borrow.
Home Equity Loan Calculator
A home equity loan calculator comes in handy when you have to determine how much you can borrow and how much you will owe by the end.
There are online options for doing so, such as the US home equity rate & payment calculator, where all you have to do is insert a few of your information and it will generate an estimated sum of how much equity loan you’re likely to borrow.
How to get a Million Dollar loan?
You can need a million dollar loan for any of your major expenses, and there are many sources you can utilize to help you with that.
SBA: Small Business Association (SBA loans) are guaranteed by the private sector and are best for businesses looking to expand their scale or for strong-credit people who can wait for a long time for funding. These usually have very low interest rates and the borrowing limit can go up to $5 million as well.
Business Line of Credit: It provides access to funds up to the credit limit, and interest is paid only on the amount you have drawn. Since this is a form of an unsecured loan, you don’t have to provide anything in collateral.
Term Loans: These are a very common way of financing businesses; you get the loan and you return it with an agreed-upon rate of interest. This is a relatively quicker way of getting cash upfront to invest.
Are Equity Loans a Good Idea?
Borrowing cash from your home equity has its own share of pros and cons, but is it really a good idea borrowing money against your home?
If you take a loan and you realize you can’t pay over time (note the interest being added to the actual amount), the lender has the right to claim some portion of your property. So equity loans not paid back are actually you losing part of your ownership on your home.
However, it could also work for you in case of low taxes and interest rate. Since your house is used as collateral, you are likely to get a better deal on your individual situation.
If you’re looking to invest in real estate, that’s a little risky. Real estate markets are uncertain and they tend to crash at any given moment. So if you’re taking an equity loan to invest in real estate, make sure you don’t lose more than you gain in your transaction. Or if you want to invest in a risky business that you’re just starting and that its chance of being successful is really thin, you should drop the idea of going with a home equity loan option.
Getting a million dollar loan isn’t easy, but make sure you’re investing in a risk-free domain. Similarly, home equity loans are also only considered a good idea if you’re not risking your ownership leverage and are actually able to pay back.
If you’re still considering a home equity loan, make sure you’ve used an online calculator tool to have an estimate of how much you can borrow against the current equity value of your property. This way only you will know if your expense is being met rather than blindly jumping to the spot.