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Home Equity Loan

Owning your own home is an important investment. With this investment comes various financial options. You can access what you’ve paid into your home and its value to make other current expenses easier to manage.

Home equity loans can be a great way to get the money you need for home improvements, debt consolidation, or other expenses. They’re typically offered at lower interest rates than other forms of consumer loans because they are secured by your home, just like your primary mortgage.

What is a Home Equity Loan?

You have a handful of options when choosing financing, whether you’re looking to cover expenses, pay down high-interest debt, pay student loans, or other needs.

This could include getting a personal loan or credit card, but these might not provide the most affordable terms. They often have high interest rates because they don’t allow you to offer any collateral to secure the loan. 

A home equity loan is a second mortgage on your home that uses your home’s equity as collateral. Equity is the difference between how much you owe on your home and its current market value. For example, if you have a $100,000 home with a $60,000 mortgage balance, you have $40,000 in home equity.

Home equity loans provide borrowers with a large, lump-sum payment that they pay back in fixed installments over a specific time period. Home equity loans come in two varieties: fixed-rate loans and home equity lines of credit (HELOCs). In a fixed-rate loan, the interest rate remains the same throughout the term of the loan.

A home equity loan can be a great way to access the equity you’ve built up in your home to use as cash, especially if you invest that cash in home renovations that increase the value of your home.

How to Get a Home Equity Loan

To learn whether a home equity loan is the best option for reaching your financial goals, connect with us. To get you started, we’ve outlined the steps and documentation needed to help you understand what it takes to get approved for a home equity loan.

The Financing Process

By sharing basic information about your current finances and interest in a home equity loan, we’ll work with you to pull your credit report and calculate how much you can potentially borrow, depending on the equity in your home, the home’s value, and whether you currently have a mortgage.

We’ll also discuss the terms you qualify for and your options, as well as request various documentation for the underwriting process to make sure the home equity loan begins on a solid foundation.

We’re with you through each step leading to closing, where you can begin to make the most of your home’s equity with the cash you receive.

Home Equity Loan Requirements to Meet

These are the common requirements often needed to qualify for a home equity loan. If you have questions about these requirements, we’re here to help.

  • You’ll need to have a certain amount of equity already paid into your home. Your home equity is the difference between how much you’ve paid on your mortgage and your home’s market value. To qualify, you typically need to have at least 15-20% equity in your home.
  • We’ll use the amount of equity you have to calculate your Loan-to-Value (LTV) ratio to see if you qualify. With high equity you may be able to borrow up to 85% of your home’s value, depending on how much you currently owe on your home.
  • Credit score requirements vary. In most cases, a credit score of 620 or higher qualifies. 
  • Through underwriting evaluation, you’ll need documentation of your Debt-to-Income (DTI) ratio, which shows how much of your monthly income goes to paying your current debts.
  • You may also need to verify your employment history and that you receive consistent, ongoing income.
  • Showing proof of reliable payment history on your current or past mortgage is also helpful in qualifying for a home equity loan.

Home Equity Loan FAQs

Making the most of your home and your financial goals makes a big impact on your life. It’s ok to have questions. We’ve compiled answers to the frequently asked ones, but don’t hesitate to ask more.

What is the difference between a home equity loan and a HELOC?

A home equity loan is similar to a traditional mortgage. It’s a loan rather than a line of credit. You borrow one specific amount, receive a lump sump and make regular payments during a fixed repayment period.

A HELOC differs in that it acts like a credit card. With revolving financing you can borrow, pay back and borrow again during the draw period.

For a home equity loan, you apply for the total amount of financing you need. This amount will depend on how much equity you’ve paid into your home, as that is what you’re borrowing against. You receive it as one lump sum. During the agreed-upon repayment period, you pay a fixed monthly amount that goes both toward interest and the loan principal, much like a mortgage.

Both HELOC and home equity loans offer lower interest rates than many personal loans because your home is used as collateral with the lender.

How can I use the money from a home equity loan?

In most cases, a home equity loan is flexible and can be used for any expenses you choose.

It’s common to get a home equity loan to cover expenses such as student loans, home renovations, start-up business expenses, emergency expenses like medical bills, or other things you may get a personal loan for such as buying a car.

Because its interest rates are lower, a home equity loan is also great for consolidating and paying down high-interest debt like credit cards.

How do I access the funds from a home equity loan, and when do I need to pay them back?

Once funded, you’ll quickly have access to your home equity loan funds. You can typically access them by check or by transferring the money to your checking account.

You’ll need to start making payments on your home equity loan immediately, and you’ll usually have a fixed repayment schedule. The length of time you have to repay your loan will depend on the terms of your loan agreement.

How do home equity loan interest rates compare to other financing like personal loans or credit?

Home equity loan interest rates are lower than other personal loans or credit cards. This is possible because you’re borrowing against an asset (your home) that helps to secure the loan. 

Your home is valuable collateral that the lender can rely on if you can’t repay your home equity loan. This makes lending the money less of a risk for the lender so that you can have easier access to financing.

It’s also something to consider if you have concerns about repaying a home equity loan because if you can’t make payments, your home is on the line for the balance you owe.

What type of income is needed to qualify for a home equity loan?

You’ll most likely need proof of reliable ongoing income to be approved for a home equity loan, because consistent income shows that you can make monthly payments to pay back your loan. This might include providing W-2s and pay stubs.

If your income is too low to get approved, a co-signer may help to meet Debt-to-Income (DTI) requirements.

Your DTI ratio should be 43% or less in order to qualify for a home equity loan. To calculate your DTI ratio, add up the monthly payments on the loans you have, then divide them into your gross monthly pay. For example, if you have a student loan payment of $500, a car payment of $300, and a mortgage of $1,900 (equating to $2,500 per month) and make a salary of $75,000 per year (or $6,250 per month), your debt-to-income ratio is 40%.

If you don’t have consistent income from a traditional job, it may be more challenging to get approved for a home equity loan but there are other sources of income that can be considered. This might include income from investments like real estate or retirement accounts, self-employment, a pension, a trust fund, social security, child support, long-term disability, or VA benefits.

We’ll help you determine if you have the necessary factors and documentation in place to get approved for a home equity loan.