Wondering if you can qualify for a home equity loan? Recent indications suggest that second mortgages are on the rebound, but that doesn't necessarily mean they're easier to get.

Many lenders are reporting substantial increases in home equity lending over the past year. JP Morgan Chase recently reported that it's seen a 35 percent increase in the cash volume of its home equity lending over the past year, while New York-focused McGraw-Hill Federal Credit Union reported a 53 percent increase over the same period.

The credit reporting bureau Equifax reports that the total number of home equity loans approved in the fourth quarter of 2012 represented a 19 percent increase over the same period in 2011, while the number of home equity lines of credit (HELOCs) were up 13 percent.

Lenders haven't necessarily gotten fast and loose with the cash again. Qualifying standards for any type of second mortgage are still much tighter than they were before the housing crash.

Home values, confidence rising

What has happened, though, is that homeowners are regaining some of the equity that was lost when home values collapsed, thanks to rising home values in many areas. They're also feeling more confident about their personal finances, so they're more comfortable using their home as collateral for a loan.

Borrowers are also being more cautious about their reasons for taking out a home equity loan. Today's homeowners are much less likely to seek such a loan to fund vacations or other lifestyle expenditures, as was common during the housing boom. Instead, they're more often used for things like funding home improvements (which increases the value of the property), business investment, education costs, medical expenses or other major necessities.

Can you qualify?

What do you need to get a home equity loan? Well, the obvious thing is home equity - most lenders will demand that you have at least 20 percent in your home and preferably more. You'll also need decent credit - you may be able to qualify with a FICO score around 680 or so, but your odds (and your interest rate!) will be much better if you've got a score of at least 720 or better.

Home equity loans, of course, come in two main types. First is your standard home equity loan, which is when you borrow a single lump sum, the other is a home equity line of credit, or HELOC, which sets a certain borrowing limit and take out money as needed. Both are considered a type of second mortgage, because they're secured by the value of your home.

A standard home equity loan is best for situations where you need a certain amount of money for a single expenditure or group of expenditures in a short period of time. A HELOC is better for if you need money for a series of expenditures over a period of time and may not be sure exactly how much you'll need.

Why a home equity loan?

What makes home equity loans attractive is that they can be a very affordable way to borrow. First, because the loan is secured by the value of your home, the interest rate is going to be lower than on a credit card or other unsecured loan. Also, because they're a type of mortgage, the interest paid is tax-deductable for most borrowers.

There is a risk with home equity loans, of course. Because the loan is secured by your home, you could lose the home if you fail to make the payments, the same as with any mortgage. It's this risk, and the security if provides the lender, that allows you to get such a good rate on home equity loans compared to unsecured types of borrowing. But if handled properly, home equity loans can be a very effective financial tool.

Published on February 9, 2013