How to Get a Home Equity Loan
How to Get a Home Equity Loan

Collectively, Americans have $21.5 trillion of equity in their homes, according to the Federal Reserve’s Fund Flows Report. About $6.5 trillion of that — or more than $120,000 per mortgage holder — could be mined for cash, according to the mortgage data provider Black Knight.

Home equity — how much money you have in your home, calculated by subtracting what’s still owed on your mortgage from the amount the house could sell for — is a major source of wealth in this country. Of course, homeowners can access their equity by selling, but people who don’t want to move can tap into some of their equity with a loan or line of credit. With a home equity loan, borrowers get the full amount as a lump sum, while a home equity line of credit is a pool of funds that can be drawn down as needed.

Interest rates on home equity loans or lines of credit are lower than credit cards or personal loans, although they are higher than first mortgages. Homeowners often use these loans to pay for home improvement projects or cover big expenses like college, but they can be risky and hard to get, especially in a tough economy. Before taking out any of these loans, borrowers should also consider closing costs, such as origination fees and appraisal fees, which typically total between 2% and 5% of the loan value.

Here, we explore the differences between loans and home equity lines, and help you determine if tapping into your home equity is right for you.

What is a home equity loan?

A home equity loan, sometimes called a second mortgage, works much like a first mortgage. The loan is for a fixed amount, which is paid in a lump sum and is secured by your home. You will have a fixed interest rate and repay the loan with pre-established monthly installments over a period of five to 30 years.

Normally, lenders allow borrowing up to 85% of the home’s market value. During the coronavirus pandemic, the limit was lowered to 80% or sometimes less. This means that your loan amount plus your mortgage balance cannot exceed 80% of market value. So, if your home is valued at $200,000 and your remaining mortgage balance is $100,000, you may be eligible to borrow up to $60,000. (The exact amount you can borrow will also depend on your income, credit score, and home value.)

Since home equity loans are paid upfront, they’re useful for big, one-time expenses — ideally, when you know exactly how much money you need. Some home sellers use home equity loans to put money on a new home while they wait to close the sale of their current home, although it’s risky.

What is a home equity line of credit?

Rather than a fixed amount loan, a home equity line of credit – commonly referred to by the acronym HELOC – is a revolving line of credit. It’s like a credit card, but your house is the collateral.

A HELOC has a credit limit. You can borrow up to this amount by writing a check or using a credit card linked to the account. A HELOC’s balance grows as you use the line to make purchases, and your available credit is replenished as you pay off debt. This makes HELOCs convenient for financing ongoing home improvement projects or other intermittent expenses.

Like a home equity loan, the full line plus your mortgage balance can be up to 80% of the appraised market value of your home. You only make payments on the amount you have drawn from the line. Keep in mind that your lender may require a minimum withdrawal when you open the account or later. Be sure to ask.

You should also inquire about the length of your drawdown and redemption periods. Typically, you can borrow on the line for five to ten years. Be aware that you may be required to repay the entire debt at the end of the drawdown period or have a lump sum payment at the end of the loan. Other HELOCs have a payback period of 10–20 years after the draw period ends; it’s usually a safer bet.

It’s common for lenders to only require interest-only payments during the drawdown period, which means you’re not making progress in paying down your balance. (Additional principal repayments will save you money on the interest you’re charged and help reduce your overall debt faster.)

HELOC interest rates tend to be lower than home equity loans (in October, the average rate on a HELOC was 4.55% versus 5.10% on a home equity loan). However, most HELOCs charge variable interest rates instead of fixed interest rates. This may mean you have a lower rate and a monthly payment at first, but the rate may change from month to month. Ask if the rate offered to you is a temporary discount.

After an introductory period, most lenders base HELOC rates on the US prime rate, which is an index of corporate rates charged by major banks. Lenders then add a one-time margin which is set at the start of your loan. Be sure to ask for your individual margin rate and check the cap on interest rate changes over the life of the loan.

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If your income has taken a hit, a home equity loan may offer less expensive help.

Using a line of credit secured by your home equity can help you in times of need. Click below to find out more.

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How to Get a Home Equity Loan or Home Equity Line of Credit

The requirements to qualify for a home equity loan or HELOC have become stricter during the coronavirus pandemic. Here are the steps to follow when applying.

Step 1: Check your home equity

To qualify for a home equity loan or HELOC, you must have equity in your home. Borrowers who are upside down on their first mortgage — meaning they owe more than the home’s current value — cannot get this type of loan. It’s also unlikely to be an option for new homeowners who haven’t yet built up equity through appreciation or regular mortgage payments. Retaining as much equity as possible is also a good insurance policy against falling home values, so try to avoid borrowing more than you really need. Most lenders cap home equity borrowing at around $250,000 or less.

Step 2: Check your credit score

Borrowers must prove they have an income, so people who have been laid off or furloughed will not qualify for a home equity loan or line of credit. Lenders also generally won’t provide equity debt in your home if your credit score is below the mid-600s. During the coronavirus pandemic, many lenders have raised the requirement to somewhere in the 700s, and some temporarily stopped accepting applications in the first months of the crisis.

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Step 3: Compare rates and fees

As with your first mortgage, it pays to shop around for rates, fees and, with a particular HELOC, repayment terms. Ask lenders about fees, such as application fees, annual fees, and cancellation or early closing fees. With HELOCs, it’s important to read the fine print and understand the seemingly small details that can make a big difference in how much and when you pay.

Are home equity loans and home equity lines of credit safe?

Remember that taking out a home equity loan or HELOC increases the amount of debt you have on your home. Lenders on these products generally take a second lien position, behind your first mortgage. If you can’t pay, you can be seized.

If the value of your home goes down, your net worth also goes down. Don’t withdraw more than you could reasonably repay (this also increases your chances of being approved).

Take out a home equity loan or refinance: which is better?

An alternative to taking out a second mortgage is to refinance your first mortgage. If you simply want more money in your monthly budget, you may be able to lower your monthly mortgage payment by refinancing at a lower mortgage rate.

If you need cash now, you can opt for a cash refinance. With this type of refinance, the money you need is added to your loan balance, reducing the amount of equity in your home. Instead of adding a second home loan, a cash refinance replaces your current mortgage with a new one.

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Make your home equity work for you with a cash refinance.

A cash refinance allows you to borrow against your existing capital, freeing up additional cash for debt consolidation, education costs, and more. Click below to get started.

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Borrowers with poor credit may have an easier time qualifying for a cash refinance than a HELOC or home equity loan. Keep in mind, however, that refinancing resets your mortgage clock, which means you’ll be paying longer. With a cash refinance, you also pay closing costs on the full loan amount instead of just the cash you need.

More money :

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