How to Get a Home Equity Loan
Are you thinking about getting a home equity loan? Wondering what they are all about? A home equity loan is a second mortgage that gives you a portion of your equity as a single, lump-sum payment that you can use however you like. Home equity loans and HELOC credit lines are very popular in today’s market of rising interest rates. Home equity loans are surging in popularity because homeowners can keep their existing low interest mortgages while taking out a subordinate loan out for additional cash out.
The money you borrow has a low, fixed interest rate that you pay back over 20 or 30 years every month. If you don’t pay the equity loan on time, the lender may foreclose.
How much you can borrow depends on your credit history, debt-to-income ratio, and income. Most lenders limit you to borrowing 80% of the equity in your home, including what you currently owe on the first mortgage.
Example: Your home is valued at $350,000 this year and you owe $200,000. The lender lets you borrow 85% of the home’s value. So, you can borrow $297,000. Take away the $200,000 you owe and you can borrow about $97,000.
That isn’t to say that you SHOULD borrow that much money. Sometimes a lender will let you borrow more money than you need. It’s smart to calculate how much money you need and leave as much as you can in the home.
The more you borrow, the higher the monthly payment and greater the risk that you might not pay it back.
What Are Home Equity Qualifications to Get Financed Today?
Every lender is different. But we can say these are typical requirements:
- At least 15% or 20% equity in the home; the more equity you have, the lower the interest rate because it’s not as risky for the lender.
- A credit score of at least 620. You should have a score around 700 for the best rates, but you can still borrow sometimes with a lower credit score in the 600s.
- DTI of 43% or lower. Some lenders want you to have a DTI under 40%.
- The lender will usually want a current appraisal to ensure the home is worth what you want to borrow plus your current mortgage.
What About A Home Equity Line Of Credit?
If you are shopping for a home equity loan, you probably heard the term HELOC, too. This is a home equity line of credit that is similar to a home equity loan, but there are two differences.
First, a HELOC is a credit line. The lender gives you a line of credit up to your approved amount of equity you can pull out. You don’t have to use the entire credit line and don’t need to take it all out at once.
You only pay interest on the money you are using, so your borrowing costs could be lower than a home equity loan if you don’t use all the money.
HELOCs also have a variable interest rate usually pegged to the Prime rate or LIBOR Index. A HELOC could have a lower interest rate up front; teaser rates are common for the first year. But the rate could rise considerably later.
A HELOC also has an interest-only ‘draw’ period where you pay interest only. But after the draw period is over, you need to pay principal and interest.
The fact that payments usually rise substantially with HELOCs can make them riskier for some borrowers. If your income declines or you lose your job, you could find you can’t make the higher payments.
A home equity loan usually has a higher overall rate, but the payments are fixed until you pay off the loan. You know exactly what you will need to pay in year 1 and year 10.
Home Equity Keys
Borrowing home equity with a home equity loan has become popular again in 2022 and beyond as more homeowners have higher home values. Inflation, housing demand, and supply chain problems have boosted the values of existing homes.
Read more about home equity transactions from the FTC.
It is tempting to borrow some of that equity to make home improvements, pay off credit cards, or fund college tuition. But you need to figure out if you will be able to handle the additional debt payments. Also, the home is on the line when you borrow against it with a second mortgage.
So, a home equity loan can make a lot of financial sense because of the high amount you can borrow and the low interest rates. Just make sure you can pay it back. Once you crunch the numbers and determine your needs, talk to your mortgage lender about a home equity loan. Find out more on tax incentives for HELOC interest today.
What Are the Home Equity Loan Requirements Today?
One of the greatest things about owning a home is building equity. As you make your payments and the home’s value rises, you can build hundreds of thousands of dollars in equity that you can sometimes borrow against.
While some homeowners do a cash-out refinance to tap equity, what about if you already have a low interest rate? That’s when you may consider a second mortgage and home equity loan. If you are thinking about tapping your equity with a home equity loan, let’s look at what the qualification requirements are.
Home Equity Loan Overview
A home equity loan is a second mortgage that allows you to borrow up to 80% of the equity in your home. A home equity loan is a single, lump sum payment that represents most of the equity in the property.
Home equity loans have a fixed interest rate that usually ranges between 5% and 6% in 2022, depending on the markets and your credit rating. You pay the money back in monthly payments over a fixed term, usually 10 or 20 years. Home equity loan rates are usually fixed, while a home equity line of credit (HELOC) has variable rates.
Why would you want a home equity loan?
- Fixed payments. If you like predictable payments that do not change, a home equity loan could be for you. You will always pay the same amount every month until the loan is fully paid.
- Lower costs: The interest rate for borrowing equity is usually lower than personal loans and credit cards. That’s why many people use a home equity loan to pay off credit card debt.
- Longer terms: You have a variety of terms available, depending on the lender – 5 to 30 years.
Home Equity Loan – HELOC Requirements
Whether you choose a HELOC or home equity loan, you will need to qualify on your finances and credit to be approved. The exact requirements vary from lender to lender, but usually you need:
- At least 20% equity in the home
- Credit score of 650+
- Low debt to income ratio
- Enough income to pay the first and second mortgage and other debts
- Timely payment history from the last two years.
Equity In the Home
To qualify for a home equity loan, you need to have 15% or 20% equity in the property, depending on the lender. Equity is defined as how much you owe on your first mortgage and the home’s market value. These figures are used to calculate your LTV which determines if you can get the loan.
Let’s say you have a mortgage balance of $150,000 and the value of the home is $450,000. You divide the loan balance by the home value to get 33%. So, you have 67% equity in the home.
This number also tells you how much money you can borrow. You can usually borrow 80% or 85% of the home’s appraised value. So, in this example, 85% of the value of the home is $382,000. If you owe $150,000, you can borrow about $232,000 with your home equity loan.
How can you build equity in the home?
- Pay the mortgage on time. Paying down the home loan over many years increases the equity in the home. Making more than the minimum payment grows your equity more quickly.
- Do home renovations: You can improve the home to boost its value. If you use your home equity loan to make improvements, you may be able to write off the mortgage interest.
- Home increases in value: Real estate general increases in value over time. As time passes, the property should rise in value, so you will have more equity.
The Importance of Credit Score
It’s important to have good credit to be approved for a home equity loan. Standards vary, but most lenders will reserve the lowest rates for people with a credit score of 700 and higher. However, some lenders may approve you with a credit score between 620 and 699, but you will probably have a higher interest rate.
If you don’t have a credit score of at least 650, it may be best to pay down debt and improve your payment history before applying for a home equity loan.
DTI Of 43% Or Lower
Another key point is what your debt-to-income ratio or DTI is. Some lenders may want your DTI to be under 36% of your gross monthly income, but there may be lenders that allow 43%.
Before you apply for a home equity loan, figure out what your DTI is. If it’s above 43%, you may not be approved, or there will be a higher interest cost to the loan.
A home equity loan can be a good choice for someone who needs equity for one large purchase, such as a year or two of college tuition.
However, if your need is for money over a longer period and in installments, a home equity line of credit may be preferable. Talk to your mortgage lender about both second mortgages to find out which works better for your situation.
What Credit Score Is Needed for Home Equity Loans and Credit Lines
Is your home rising in value? Do you have at least 20% of your mortgage paid off? Then you could be a great candidate for a home equity loan.
According to Experian, a home equity loan or second mortgage that lets you borrow some of your home’s equity without having to sell the house. If you qualify for the mortgage, you can take 80% or 85% of the home’s value (including your mortgage amount remaining) in cash.
A home equity loan is a lump-sum payment with a fixed monthly interest rate. Interest rates vary by lender, but you can expect a rate of 5-6% if you have decent credit in many situations in 2022.
The rate is higher than a first mortgage because it’s a higher risk for the lender if you default. But the rate is still much lower than most credit cards and personal loans. For that reason, a home equity loan is a popular choice for home improvements, college tuition, and paying off debt.
A home equity loan may be a wise financial decision if you need a lump sum of cash. However, people who need money in installments over several months or years may be better suited to a home equity line of credit (HELOC).
A HELOC loan is a credit line that uses your home’s equity. You only pay interest on the amount of money pulled out. A home equity loan, on the other hand, requires paying interest on all the money from the beginning of the loan.
With a home equity loan, you have fixed monthly payments over five to 20 years usually. When it’s paid off, you cannot take money out again without another approval.
A HELOC can be paid off and reused, if your credit is good enough. HELOCs also have variable interest rates and usually have a lower teaser rate during the first six to 12 months.
Credit Score for A Home Equity Line
You need decent credit to be approved for a home equity loan. Most lenders give the best rates to people with at least a 700-credit score. However, you may qualify if your credit is between 620 and 699. Your rate will be higher and the repayment term may be shorter.
If you have a lower credit score, the lender may put more emphasis on your debt-to-income ratio or DTI. Your DTI measures your total monthly debt payments compared to your gross monthly income.
Most lenders want a DTI of 40% to 43%. If you have a credit score under 700, having a low DTI may get you approved faster.
Another factor with a lower credit score is how much equity is in the home. Most lenders want at least 20% equity to borrow money. But if your credit score is well below 700, having more equity will assure the lender that you will pay it back.
The more equity in the home, the less lender risk. Most people are more likely to pay a loan when they have a lot of equity in the home. Remember if you don’t make the payments on time, the lender has the right to foreclose.
Credit Score and Interest Rates
Most home equity loans have fixed rates that you pay back in five or 10 years. People who prefer financial certainty often prefer a home equity loan. If you are ok with a changing interest rate that may have lower payments up front, a home equity line of credit is a good choice.
If your credit score is below 700, you can still get a loan possibly, but you will have a higher rate and more stringent loan requirements. You can get better terms and interest rate if you pay down debt and improve your payment history.
Also, try to lower your DTI so you can still qualify for a lower rate even with a mediocre credit score.
A home equity loan is one of the most popular financial products today. As more homeowners have high amounts of home equity, it’s common to borrow some of that money for various reasons.
A popular option is to take money out to renovate the property. When you add value to the home with renovations, you are paying yourself back in a way.
Plus, when using the money to improve the home, the interest on the loan may be tax deductible. This can save you hundreds or even thousands on your taxes in the year after you take out the money.
There are many home equity loans on the market, so talk to your lender today to find out if a home equity loan is a good fit for you. If not, a HELOC also may be a good choice.
Are there Guaranteed Home Equity Loans for People with Low Credit Scores?
Many Americans want to get a home equity loan in 2022. Home prices have risen quickly in the last two years, with some areas seeing appreciation of 20% or 30%. It’s not surprising that homeowners want to pull out some of that cash to pay off debt or do home renovations.
But how to get a home equity loan with bad credit? Below is essential information to know if you’re in this situation.
Home Equity Loan and Poor Credit
The best way to get a home equity loan with bad credit is to have plenty of income and a low debt-to-income (DTI) ratio. Also, you should have at least 15% equity in the property.
If you have a credit score in the low 600s and can meet the above qualifications, you may be able to get approved. In fact, getting a home equity loan with bad credit and the above criteria may be easier than qualifying for a personal loan.
This is because a home equity loan is secured by the property. If the home is collateral for the loan, the bank has some assurance you will pay it back. After all, you are borrowing equity from the house and must pay it back to keep the house.
Equity Loan Qualifications for Bad Credit
Not every lender will lend to you if you have bad credit, but expect to see qualifications such as:
- 15% to 20% equity in the home
- At least a credit score of 621
- A DTI of no more than 43%, but a few lenders may allow 50%
- No late payments on anything on your credit report in the last two years
- Stable income and employment history
A few lenders may approve someone with a 620 credit score, but it’s harder in 2022 to find them. Check with several lenders to see what their credit criteria is.
It also can help to look for credit from small banks that don’t state a minimum credit score for approval.
Steps To Apply for A Bad Credit Home Equity Loan
First, review your credit report. You can order yours for free once per year from AnnualCreditReport.com.
Check for any mistakes on your credit report. If you find anything you think is wrong, contact the credit agency and ask for it to be investigated and removed.
It’s important to regularly review your credit report so you can make sure you have a clean payment history for at least the last year.
When you have bad credit, it’s unlikely you will be approved for a home equity loan if you have late payments in the last 12 to 24 months.
Second, look at your DTI. Your DTI is a comparison of your monthly debt payments to your monthly gross income.
Say you have $2000 of monthly debt payments and a $5000 monthly income. So, your DTI is 40%. This may be higher than optimal for some lenders, but some might approve you with plenty of income to cover your debt payments.
The higher your DTI with bad credit, the harder it is to be approved for a home equity loan. Even if you make all your payments on time, there is a chance that a financial problem could make you late on your home equity loan payments.
Keep the DTI as low as possible, but most experts recommend having it below 43%.
Third, you need to have enough equity in the home, and it’s even more important with bad credit. It’s true you can qualify with some lenders with only 15% equity in the home. But the more equity you have with bad credit, the better your rate and terms.
For instance, say your home is worth $400,000 in 2022. If you have $250,000 on the loan, you have an LTV of 62.5%. This means you have 37.5% equity, which is plenty of equity to qualify for a home equity loan.
Last, think about how much money you need to borrow. Most lenders let you take out 80% or 85% of the home’s value, minus what is owed on the loan.
Let’s say you have a $400,000 home and the maximum you can take out is $340,000. Subtract what you owe – $250,000 – and you can get a total of $90,000.
However, do you really need $90,000? The more you take out, the higher the payment, and the harder to qualify for the loan with bad credit. So, carefully calculate how much you need to borrow before filling out the application. If you need $25,000 for a home improvement, maybe take out $30,000 to be safe and leave the rest in the home.
A home equity lender will be more skeptical about approving the loan with bad credit if you take out as much as possible.
It IS possible to qualify for a home equity loan with bad credit! Just remember the above tips and check with several lenders, and you may get the cash you need.
Is It Smart to Take Out Equity on Your Home to Pay Off Debt or Use a Credit Card?
Getting a home equity loan or home equity line of credit (HELOC) to get equity to pay off your credit cards can make financial sense. Credit cards usually have a much higher interest rate than home equity loans.
However, there are risks involved to consider. Most significant is the risk that you cannot make your home equity loan payments and lose the home. While not paying credit-cards can cause problems, it’s not as bad as foreclosure.
How To Use Equity to Pay Off Credit Cards
To pay off high-interest loans with equity, you need to qualify for a second mortgage – either a home equity loan or HELOC. Equity is the part of the value of the property you don’t owe the lender.
If a home is worth $350,000 and you have a balance of $250,000 on the loan, you have $100,000 of equity. A home equity loan, which is a lump-sum payment to you, lets you access part of that $100,000.
The money can be used in any way you like and you usually have 20 or 30 years to pay it back. With the longer repayment period and a fixed interest rate, you can save hundreds of dollars per month in interest charges on credit cards.
Why Borrow Home Equity?
The biggest reason it’s usually the cheapest money you can borrow because of the low interest rate. The money is backed by the home you live in, so you are more likely to pay it back. Other benefits of using a home equity loan or HELOC to pay off credit cards are:
- Lower interest rates: Credit cards these days can have 20% or higher interest rates. A home equity loan may have only a 6% or so rate or even lower. A HELOC can have a 4% starting rate that varies. Either way, that’s a lot of saved interest.
- Long repayment time: You can often take out a home equity loan for 30 years, so the payments are lower.
- Low monthly payments mean better monthly cash flow.
- You can borrow more: Depending on the equity in the home, you can probably borrow a lot more than with a personal loan.
- Fixed interest rates: A home equity loan has a fixed rate, while credit cards vary.
Limits On Borrowing Equity
The go-go days of the early 2000s are behind us. Gone is the time when you could borrow 100% or 105% of your home’s value. Today, you need to leave 15% or 20% equity in the home. Doing so reduces the lender’s risk.
Some lenders might only let you borrow 70% of the home’s value (combined with what you owe on the mortgage), while others may let you access 90%. It depends on the lender and your credit score and debt load.
Let’s say your home is worth $350,000 and you owe $250,000, so you can access $100,000. You have borrowed about 71% of the home’s value already, so you can access $30,000 if the maximum you can borrow is 80%, or $65,000 if you can borrow 90%.
Downsides to Using Equity to Pay Off Credit Cards
If you are disciplined, using equity to pay off credit cards can work well. But there are downsides to consider:
- The home is collateral for the loan. Both types of second mortgages are secured by the home, so if you don’t pay, you could lose the home. There is no collateral for credit cards, so you don’t usually risk anything other than a damaged credit score.
- Home could be harder to sell: If you borrow equity, there is a chance home values could crash and make it hard to sell. This is what happened during the mortgage meltdown in 2009 to many borrowers.
- Pay higher interest: Your annual interest rate is lower but you are paying a loan for many years, so you could pay more interest overall.
- Closing costs: Most second mortgages have closing costs, so factor them into your decision.
The Leverage Home Equity
Paying off credit cards with home equity may be a smart move, if you have discipline and stable finances. Talk to your mortgage lender today to learn what the qualifications are for a home equity loan or HELOC.
How to Get Cash with the Equity in Your House with an Equity Loan or a Home Equity Line of Credit
About 65% of American homeowners saw their equity rise by $3 trillion from 2020 to 2021. That means the typical borrower realized about a $51,000 gain in equity over just 12 months. With so much equity available, people are asking how to get cash with their home equity. Many people have a chance to get the cash they need from their homes with a 2nd mortgage or home equity line of credit. If you have been calculating home equity and considering pulling out cash, our helpful home equity guide will help with your decision.
Why Take Out Home Equity?
The biggest benefit of using home equity is it provides a large amount of cash with a relatively low interest rate. Most Americans can access this cash at much lower rates than with a credit card. For example, the average credit card interest rate this year is almost 17%, but the average rate for a HELOC is only 4.3%. Imagine the thousands in interest you can save by taking cash out of your home versus an unsecured loan.
Financial experts point out that home equity is often the least expensive form of financing that most homeowners can access. The money is secured by your home, so you can tap the money at a lower interest rate. Plus, the interest on the loan may be tax deductible if it is used to renovate your home or build a new home. Note there were tax law changes in 2018 that have restricted the tax deduction for equity. If the money is used for something other than home renovation, the interest is not tax deductible anymore.