How a 100 Percent Home Equity Loan Works

A 100 percent home equity loan allows you to take cash from your home up to its full fair market value, or FMV, minus the balance of your first mortgage. It's a second mortgage, as it is recorded in back of your primary mortgage. A 100 percent equity loan uses your home as collateral for your loan proceeds. You can use the cash you receive for any worthwhile purpose, including paying off higher-interest-rate debt, education tuition, medical expenses or home improvements.

Shop Around

Although 100 percent home equity loans are offered by only some lenders, terms can vary widely. Shop around for lenders that offer this financing, comparing their rates and terms. Also closely examine lender qualification requirements, as these high loan-to-value loans may be restricted to borrowers with excellent credit and significant monthly income. You want some assurance that you will qualify for the loan you want before you apply.

Home Equity

Having a good estimate of your equity in your home helps make this loan work. Begin by evaluating the current value of your home. Examining recent sales prices of similar homes in your neighborhood helps your value estimate. Once you have a value range, subtract your current first mortgage balance from your home's estimated worth. The result will approximate your equity at 100 percent. For example, if your home is worth $180,000 and you have a first mortgage balance of $110,000, you'd have equity of $70,000. This is the maximum cash you could receive from a 100 percent home equity loan.

Appraisals

Lenders want full fair market value appraisals for 100 percent home equity loans. This will cost you between $300 and $800, depending on your area and the difficulty involved in appraising your home. Difficulties tend to arise when there are few recent sales of similar homes in your neighborhood. Rural properties can be particularly challenging, as fewer homes translate to fewer sales, causing lenders and appraisers to have less confidence in their fair market value opinions.

Downsides

Lenders and borrowers face increased risk and dangers of default with this type of financing. Both you and your lender assume your home's value will increase over time, reducing the loan-to-value ratio under 100 percent over time. You should have confidence in the stability of your income when you get this type of loan. If it is an adjustable-rate loan, you should also have confidence that interest rates will not significantly increase in the near future, causing your payment to rise.

Rates and Terms

Rates are often calculated using the prime rate as a basis. Lenders often use this national index as the base rate and add a margin of 1 percent or more. Loan terms typically give you five to 15 years to repay. Some lenders also offer home equity lines of credit to their 100 percent home equity loan menu. Lenders may allow you to draw money for up to five years, followed by monthly payments over a 10-year term. These home equity loans may come with fixed or adjustable rates.

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