The Benefits of a Mutual of Omaha Home Equity Loan

If you have equity in your home, you might be able to borrow against it with a Mutual of Omaha home equity loan. You can use the proceeds to pay off credit cards, make improvements to your home or cover emergency expenses. Here are a few things you should know before taking out a Mutual of Omaha home equity loan.

What Is a Home Equity Loan and How Does It Work?

A home equity loan is a type of mortgage. The homeowner borrows a specific dollar amount against the equity of their home — the difference between the current value of the home and the total balance of all outstanding mortgages — and typically repays that sum in fixed monthly installments over a set term. Unlike a first mortgage, which is used to purchase a home, a home equity loan is made after the borrower already owns the home and has built up equity in it.

When made on a property that has an active first mortgage, a home equity loan takes a subordinate position. That means if the borrower defaults, the second lender doesn’t get repaid a dime from the foreclosure proceedings until the first lender has been paid off in full. Because of this higher risk level, lenders generally charge higher interest rates for home equity loans than for first mortgages.

What Are the Benefits of a Equity Mortgage?

Home equity loans offer a number of benefits over other types of loans:

• Low interest rates: Because they're secured by what is typically the borrower’s most valuable and important asset, home equity loans carry lower interest rates than other types of personal loans.
  
  
• Easy to get: Since the borrower's home serves as collateral on a home equity loan, lowering the lender’s risk, the lender is more likely to approve a home equity loan for a borrower with imperfect credit.
  
  
• Fixed interest and payments: Home equity loans usually have fixed interest rates and payments over their entire repayment terms.
  
  
• Tax benefits: Borrowers can deduct the interest on a home equity loan from their taxes if they use the loan proceeds for certain expenses such as home improvement.

What Are Home Equity Loans Used For?

A borrower can use the proceeds from a Mutual of Omaha home equity loan for whatever they want, though it's usually a bad idea to cash out equity for frivolous purchases such as a vacation or a luxury car. The best uses of a home equity loan include the following:

• Debt refinancing or consolidation: Because home equity loans tend to carry lower interest rates than credit cards and unsecured personal loans, they can be a great option to pay off higher-interest-rate debt and save money. 
  
  
• Home improvement: A home equity loan can go toward home improvement costs that increase the home's value at resale time (often by far more than the cost of the improvements).
  
  
• Unexpected emergencies: If an unexpected expense arises, such as a medical bill not covered by insurance, a home equity loan offers a low-interest way to cover that cost.

What Is Required to Get Approved for a Home Equity Loan?

Having equity in one's home doesn't guarantee the availability of a home equity loan. A borrower still must apply with a lender and undergo a review process. The factors most lenders consider when making an approval decision for a home equity loan include the following:

• Equity: Lenders want to know not just that a borrower has home equity, but how much equity they have. They tend to be leery when the mortgage balance is more than 80% of the home's value. It doesn't mean a borrower can't get a loan in that situation, but they usually have to have strong credit and other mitigating factors.
  
  
• Income: Most lenders have what are known as debt-to-income limits. In other words, a borrower can only get a home equity loan if their total monthly debt payments are equal to or less than a certain percentage of their monthly income.
  
  
• Credit: Some lenders have strict credit score requirements, such as 620 or 680, to get approved for a home equity loan. Others take a more holistic approach and look not just at the borrower's numerical score but at the content of their credit report.
  
  
• Appraisal: Lenders don't just take a borrower's word that their home is worth a certain amount. They will typically send an appraiser out to value the home.

What Is the Difference Between a Home Equity Loan and a Home Equity Line of Credit (HELOC)?

Another option to tap into a home's equity is a home equity line of credit (HELOC). With both a home equity loan and a HELOC, the borrower's home serves as collateral, meaning the lender has the option to foreclose on the home for nonpayment. In almost all cases, both home equity loans and HELOCs are subordinate to any first mortgage that exists on the property.

But that's where the similarities end. Whereas a home equity loan supplies a lump sum, a HELOC provides a line of credit to be used as needed. For example, a borrower who takes out a $25,000 home equity loan receives all $25,000 up front. A borrower who takes out a $25,000 HELOC receives the equivalent of a credit card with a $25,000 limit — but since that credit line is secured by the borrower's home equity, the interest rate is usually less than that of a credit card.

Home equity loans and HELOCs also charge interest differently. The rates on home equity loans are almost always fixed over the life of the loan, while HELOC rates are variable — they can go up and down based on market rates as well as on changes in the borrower's credit profile and payment history. Also fixed are the payments on a home equity loan, and each one goes toward both principal and interest.

A HELOC, on the other hand, offers an interest-only minimum payment option, similar to a credit card, but taking this option makes it easy to get stuck on the hamster wheel of never-ending payments that don't make a dent in the principal balance.

Deciding if a Mutual of Omaha Home Equity Loan Is Right for You

Before taking out a Mutual of Omaha home equity loan, you should determine what your specific goals are and weigh your options. Consider factors such as the monthly payments and how they will impact your household budget. A financial advisor or mortgage professional can work with you to structure your loan to where it best suits your needs.