Can You Get a Home Equity Loan With a Mortgage?
While a home equity line of credit allows a homeowner to maintain a line of credit, a home equity loan allows the borrower to withdraw equity in his home in one lump sum. Home equity loans commonly take the form of a second mortgage, where both a first and second mortgage are secured by the value of the home. Homeowners can lock in this type of loan at a low fixed rate for the duration of the loan and make monthly payments on the loan, according to Bank of America.
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Benefits
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Homeowners can use a home equity to consolidate credit cards, as home equity credit rates are significantly lower than credit card interest rates. Alternatively, borrowers may use these lines in order to finance home renovations, fund their education or pay for discretionary purchases. With a home valued at $200,000 with $100,000 equity, a homeowner can take out a 25-year home equity loan for $30,000 at 6.99 percent interest, according to Bank of America in March 2011.
Considerations
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To qualify for a loan, homeowners must have significant equity in their home. Homeowners can accumulate equity through home appreciation, where rising home prices increase the appraised value of their home, or by paying off a significant amount of their loan balance by making regular payments on their mortgage for a number of years.
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Loan to Value
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To calculate home equity, lenders use a loan-to-value ratio, a comparison of the appraised value of the home compared to the amount of ownership the homeowner has in the property. For example, a borrower who owns a home appraised at $200,000 and owes $100,000 on his mortgage has a loan-to-value (LTV) ratio of 50 percent. The maximum LTV ratio depends on lender underwriting standards, but banks usually require between a 70 and 80 percent LTV ratio according to US Bank.
Warnings
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Borrowers must have a credit score of at least 660 to qualify according to Credit Scoring, and they must have sufficient income to justify the lender underwriting the home equity loan. Homeowners who have lost equity due to declining property values will not usually qualify for a home equity loan, if the value of their first mortgage exceeds the appraised value of their property.
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