If you are a homeowner and a small business owner, you might find money you need to grow your business in the value of your home. Owning a home allows you to build equity over time. You can use that equity to secure low-cost funds as a “second mortgage” through a home equity loan line of credit (HELOC). Read on to learn more about home equity business loans and if you should use it for your business.
What Is a Home Equity Loan?
A home equity loan can give cash in the form of a lump-sum payment that you can pay back at a fixed rate. They are available at many banks, credit unions and online lenders with a payback period between five and 30 years. There are various uses for a home equity loan such as home improvement projects, debt consolidation, and more.
The lender will review your application and credit to determine how much you are able to borrow, and what your interest rate and loan term will be. It is important that you understand this information before signing up for a home equity loan to avoid any unexpected costs.
Using Your Home Equity Loan for Business
A home equity loan line of credit is a line of credit you can use as needed and can repay flexibly like a credit card. There are both advantages and disadvantages to using a home equity loan for your business.
- Low interest rates on home equity loans: they are less risky for lenders, so they have lower interest rates than a business credit card or personal loan.
- Low monthly payments and total cost: compared to credit cards, they have low monthly payments as well.
- Low credit scores do not affect you: if you have a poor credit score, it will not affect your ability to be qualified for the home equity loan. There are loans available for those who have a score of 600 or less.
- Large amounts of funding available: you can have access of $100,000 to $500,000 available to you if you have a lot of equity in your home. If you have a low debt-to-income ratio, a home equity loan can be a better alternative if you are looking for large amounts of funding.
- Foreclosure risk: if you have a first mortgage on your home and take out a home equity loan, the original mortgage lender has the right to money from a foreclosure sale.
- Closing costs, processing fees, and appraisals: home equity loans have low interest rates than unsecured loans or credit cards but do have other costs.
- Need equity: you need to have equity or value in your home to qualify for a home equity loan. You need at least 20% equity to be approved.
- Extensive documentation is required: every lender has different requirements for what they need but you will likely need to have documentation of your income for up to the past two years.
How to Qualify for a Home Equity Loan
Here are some of the minimum requirements to qualify for a home equity loan.
- A credit score of 620 or higher. If your score is over 700, you will qualify for the best rates available.
- You have a maximum loan-to-value ratio of 80 percent or 20 percent of equity in your home.
- Your debt-to-income ratio is less than 43 percent.
- You have ability to repay your loan.
Be sure to shop around for the best deal as lenders have different borrowing requirements and rates for home equity products.
Home Equity Loan Alternatives
There are other loan alternatives that you can consider that are just as helpful.
- You can take out a personal loan. This loan is unsecured so you will not have to use your home as collateral. If you have a high credit score, you will get a good rate.
- You can reduce your expenses to have more money in your budget to use.
- You can liquidate savings and investments.
- You can refinance your mortgage at a lower rate and withdraw cash at closing.