Home equity loans are a type of secured loan in which the borrower uses their home equity as collateral. This type of loan is often used to finance major expenses such as home improvement, medical expenses, or college tuition fees. A home equity loan creates a lien against the borrower’s home and reduces home equity. As the borrower makes payments, their home equity increases again. A home equity loan usually has a shorter repayment term than a traditional mortgage.
A home equity loan is like any other type of closed-end loan in that the lender pays the borrower a lump sum which the borrower must repay within an agreed payment term. Closed-end home equity loans usually come with a fixed interest rate, giving the borrower the predictability of fixed monthly payments for the life of the loan.
A HELOC is an open-end revolving line of credit with an adjustable interest rate. The borrower may draw funds at any time, provided they don’t exceed the approved credit limit. The borrower only pays principal and interest on the funds drawn. Like a home equity loan, a HELOC may involve closing fees at the start of the loan.
The basic requirement of a home equity loan is that you own your home. At most, lenders permit homeowners to borrow up to a combined loan-to-value (CLTV) ratio of 90% (although some credit unions may allow 100% CLTV). In other words, a lender will not approve you for a home equity loan if it means your home equity drops below 10% of your home’s current appraised value. Generally, home equity loans can only be taken on owner-occupied properties, although in some cases it may be possible to use a rental or investment property as collateral.
Aside from CLTV, all the other minimum requirements of mortgage or loan eligibility apply. You will need to be a U.S. citizen or resident aged 18 years or more. The lender will run a credit check, which will affect your credit score. And you will need to provide certain financial documentation, although less than for a traditional mortgage application.
- Offers Fannie Mae 3% down conventional loans
- Loan experts are on hand to assist at any time
- Full suite of non-conventional loans
- Rates not advertised publicly
- No weekend phone hours
- Not licensed in NY
AmeriSave Mortgage Corporation is a direct mortgage lender operating in 49 states and DC. Since 2002, it has financed more than $220,000 homes to the tune of $52 billion in funding. It is known for its competitive rates and streamlined application, with approvals in as quickly as 25 days. It offers a wide range of loans, making it a good choice for anyone looking to purchase a home or refinance their mortgage.
- Apply in minutes and close in days
- No need to wait for an in-person appraisal
- Online video notary and support
- Limited to 39 states
- Only HELs, no first mortgages
- Minimum credit score of 640
Figure is a fintech company that uses blockchain, artificial intelligence, and advanced analytics to provide consumer credit products. Founded in 2018, it offers its own unique versions of home equity loans (HELs) and reverse mortgages. By leveraging blockchain, the same technology that powers cryptocurrencies like Bitcoin and Ethereum, Figure is able to approve HEL applications immediately – and to send the funds to the borrower within 5 days
- Digital-only mortgage platform
- Loans customized to your needs
- Only cash-out refinance option is available
- No physical branches
One thing makes Rocket Mortgage stand out from all other mortgage lenders: speed. Some lenders might be able to offer you better rates, others might offer great customer service, but few come close to matching Rocket for speed. This might seem like a small thing, but speed is important in the mortgage industry. Getting stuck with a time-consuming mortgage application and not even knowing whether you’ll get approved can be costly in terms of both time and energy. With Rocket, you know where you stand within a few minutes of applying and you can save time by having all your documentation verified automatically.
Technically speaking, a home equity loan can be used for any large expense. This could include consolidating credit card debt or other debts; funding an unexpected bill, such as an unexpected medical procedure; financing a home improvement or refurbishment; purchasing a vehicle; or funding a child’s college tuition.
Generally, a home equity loan is best used for anything that improves your financial position, such as paying off debts or boosting your home’s value. Let’s say you’re struggling to keep up with payments to three separate credit card providers, all of which are charging high interest. With a home equity loan, you could replace those high-interest debts with a single, lower-interest repayment to your home equity lender.
While a home equity loan can technically be used for any purpose, that doesn’t mean it should be used recklessly. When the housing market crashed in 2007-8, many homeowners found out the hard way what it means to have a lien against one’s home. When you secure a loan with your property, that gives the lender permission to foreclose the property if you default on the loan. When taking a home equity loan, always take caution against over-extending.
A cash-out refinance is when the new mortgage is greater in value than what you owe on the old loan, allowing you to cash out the difference. A cash-out refi usually involves a lower rate than a home equity loan but higher closing costs and fees. Therefore, if you’re going for a smaller amount, a home equity loan is better. If you’re going for a larger amount, you may want to consider a cash-out refi. The exact decision depends on your home equity and your loan amount and on how much you’re able to afford in monthly payments.
A new type of home equity loan alternative gaining in popularity is a home investment, where a financing company invests in your home in exchange for a share of your home’s future sale price or market value. There are a number of different versions of this on the market, but the principle is more or less the same in all cases: you get the cash up front, and the financing company shares in your home’s appreciation when you sell.
An unsecured personal loan is the easiest way to get your hands on quick cash because it doesn’t involve any collateral and the process is very quick, with funds by the next business day. Personal loans beat home equity loans and cash-out refis for convenience, but beware: the interest rates are usually much higher. While the average cash-out refi or home equity loan rate in 2021 is 3-4%, the average personal loan rate is 10-20% - which can send your monthly payment soaring.
We described a number of home equity loan types and alternatives above, including traditional home equity loans, HELOCs, cash-out refis, and home investment products. Carefully consider all the options to figure out which is best for you.
Combined loan-to-value (CLTV) is as important a factor in refinancing as a down payment is when purchasing. If you only have 20% equity in your home, then you won’t qualify for a home equity lender with maximum 80% CLTV. Therefore, always compare lender maximum LTVs to find one that suits you.
A home equity loan might not be like your original mortgage, but it is still a loan and the interest rate (or APR, taking into account the interest rate and certain other costs) is still the most important factor in determining your monthly repayment. Always compare a few lenders to find the best rates for your financial and credit profile.
A home equity loan term can range from 5-30 years although most lenders allow 5-15 years. HELOCs usually allow up to 10 years to withdraw funds and maximum 20 years to repay. The best repayment term for you depends on how much you can afford in monthly payments. The shorter the term, the higher your monthly payments but the less you’ll pay in interest over the life of the loan. The longer the term, the lower your monthly payments but the more you’ll pay your lender in the long run.
Gone are the days when you had to walk into a physical branch to apply for a home equity loan or HELOC. These days, the best mortgage lenders let you apply for a home equity loan online, sometimes through a fully automated online mortgage platform and other times with phone assistance from a loan agent. If convenience is important to you, then keep an eye out for digital-friendly lenders.