If you're long on home equity but short on cash, taking out a loan against your property can help finance repairs, consolidate debt, pay for medical expenses or simply provide the funds for a dream vacation. The typical maximum for a home equity loan is 75 to 80 percent of the home's value, minus the amount of your mortgage -- though some lenders will exceed those thresholds and lend up to 100 percent or more of the home's value. The lender needs a property appraisal, which you will be charged for, and will pull a copy of your credit report. Beyond that, the main paperwork involves proving your income -- it's not nearly as strenuous as what's required for a primary mortgage -- but the process still generally takes between one and two months to complete.
Equity Requirement and Credit Score
There's no waiting period between buying your home and applying for a home equity loan or line of credit -- you can apply at any time, as long as you own the required percentage of your home outright that leaves you with sufficient equity once the primary mortgage is subtracted. You'll also need a solid credit score. Specific requirements vary by lender and loan product, but in general a credit score in the high 600s or above gives you the best shot.
Terms and Repayment Process
Home loan terms vary based on lender offerings and consumer preference. Many home equity loans and lines of credit have a 15-year repayment period, though they can be as short as five years and as long as 30.
Repayment can take the form of regular monthly payments, as in a primary mortgage. Alternatively, you can choose to make only interest payments early in the loan term, making it up with a balloon payment later. A particularly common offering with home equity lines of credit, this approach makes the borrowed funds more affordable early but far more costly late. Even if the balloon payment occurs toward the end of the term, the switch from interest-only to both interest and principal payments can cause a significant rise in your monthly bill.
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Starting the Process
The process of getting a home equity loan varies by lender. Some lenders offer multiple application methods, such as online, over the phone and in person. Others prefer that you apply via their preferred method, such as by scheduling a call with a lending specialist to walk you through the application and go over your qualifications. You'll be informed about the need for the exterior appraisal and for a copy of your credit report. As part of the federal Truth in Lending Act, lenders must inform you of the term and loan costs when they give you the application. If an appraisal of the interior is required, you'll set up an appointment for this. Some lenders also order a title report to verify the property ownership.
Once the application is complete, a loan underwriter reviews your profile and compares it to the lender's standards for home equity loans and to home values in your area. You might need to provide documents confirming your financial information at this stage, such as tax statements, W-2 forms or pay stubs, and bank or brokerage statements. Lenders might have a checklist of documents detailing what you'll need to provide, which helps you have everything ready when needed. If you're approved, you'll receive a written commitment that details the amount available for your loan and the applicable terms and conditions. The lender might also conduct some last-minute checks, like verifying your employment and your insurance coverage.
The final process for a home equity loan is the closing. It's a meeting between you and the lender's representative, as well as anyone else who might be needed. You'll often do this in person. You'll pay any closing costs or agree to fold them into the amount borrowed. Closing costs could include an application fee, title search fee and appraisal fee, among others. Once the papers are signed, arrangements are made to distribute the proceeds to you. If you change your mind, you'll generally have three days to cancel the loan, known as the right of rescission.
Home equity loans carry some risk. Property values fluctuate over time, and if you take out a home equity loan after buying at the top of the housing market, you could wind up owing more than your home is worth if the market then dips. With a home equity line of credit, you may wind up paying more if your agreement is tied to market interest rates. For example, if you have a HELOC set 5 percent above the prime rate, and the prime rate rises, your borrowed funds see their interest rise as well.