What is an Equity-Based Mortgage?
In many cases, equity-based mortgages present an excellent opportunity for homebuyers to realize their dreams of homeownership or for existing homeowners to access the equity available in their properties to consolidate debts, renovate or invest.
An equity-based mortgage is similar to a traditional mortgage in that it is secured against a property. However, it is granted based on the property's equity and marketability, compared to traditional income, credit, and property criteria and qualifications. These loans are available through traditional lenders if there are enough liquid assets or through alternative or private lenders if certain criteria cannot be met.
How to Qualify for an Equity-Based Mortgage?
Since equity-based mortgages do not require a standard, reliable income or perfect credit score, the criteria to qualify for this type of loan differs in comparison to other options. Here are some factors to consider:
- A minimum down payment of 20% to 35% or greater is required.
- The lender will review details like the quality of the property, as well as its location and marketability.
- These mortgages are associated with high-interest rates and fees.
Benefits of Equity-Based Mortgages
- Accessibility for Non-Traditional Buyers: These loans offer a pathway to homeownership for individuals with non-traditional income documentation or previous credit challenges.
- Flexibility in Approval Criteria: Unlike traditional mortgages, equity-based mortgages prioritize a property’s value and marketability. This shift in focus allows lenders to assess a borrower’s eligibility based on different criteria, providing more opportunities for approval.
Empowerment Through Liquid Assets: For borrowers with substantial liquid assets but irregular income streams, equity-based mortgages offer a means to leverage their financial standing to secure.
Risks and Considerations
Securing an equity mortgage doesn’t come without some risks, as with any type of mortgage. For example, you risk losing your home if you fail to make mortgage payments on time. As such, carefully evaluate your financial situation to ensure you can afford the monthly payments, even if unexpected expenses arise. To explore this consideration and others in more depth, we recommend connecting with a mortgage agent, like our team, to determine whether this option is right for you.
What is a Home Equity Mortgage?
Not to be confused with an equity-based mortgage, this type of loan allows borrowers to access the equity in their existing homes. They can borrow up to a predetermined credit limit and withdraw funds whenever necessary. The amount that can be borrowed is based on the available equity in the property and the lender’s criteria. This allows homeowners a convenient way to access funds while providing flexibility in borrowing and repayment options.
Types of Home Equity Mortgages
- Home Equity Line of Credit (HELOC): Allows homeowners to borrow against their home equity on an as-needed basis.
- Second Mortgage: Provides a lump sum of cash based on the property’s equity. Borrowers must repay the loan in fixed monthly installments over a specified period.
- Reverse Mortgage: Allows senior homeowners to convert a part of their home equity into cash. This type of home equity mortgage must be repaid once the homeowner moves out of the home or passes away.
Benefits of Home Equity Mortgages
With a home equity mortgage, homeowners can leverage the accumulated equity in their homes for various purposes. The key benefits of equity-based mortgages include:
- Lower Interest Rates: Because equity-based mortgages are secured by property equity, they present less risk to the lender. As a result, such loans often have lower interest rates, leading to smaller monthly payments.
- High Loan Amounts: Equity mortgages often allow borrowers to access up to 80% of their home’s equity, providing ample funds that can be used in diverse ways.
- Flexible Use Of Funds: Funds received from an equity-based mortgage may be used for numerous purposes, such as renovation projects, investments, or debt consolidation.
Risks and Considerations
While equity lending offers a convenient avenue for obtaining much-needed finances, it is a major financial decision that shouldn’t be taken lightly. Taking out a loan against your home’s equity will increase your debt-to-income ratio, thus impacting your ability to borrow in the future.
Applying for an Equity-Based or Home Equity Mortgage
Your application for an equity-based or home equity mortgage starts with working with our team. We’ll answer any questions you might have and ensure you have everything in order to start the qualification process.
In both cases, your home or potential home must be evaluated since these loans focus on equity. Professionals can then calculate the equity amount based on the current market value of your property.
After the home is evaluated, The Mortgage Advisors will work with you as it relates to additional documentation. After receiving this paperwork, we’ll submit an application on your behalf and negotiate the best rates and terms with the lender. Once your application is approved, our next steps include explaining the agreement to you, finalizing the offer, and facilitating the mortgage closing process.
We’re Here to Help
We would love to hear your story and help you find the right financing, whether you have had challenges securing a traditional mortgage or are looking to access the equity in your home. Connect with us today!
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