Home Equity Lenders You Trust -

June 2025

A home equity loan is a financial tool that lets homeowners borrow funds by using the built-up value (equity) of their home as security. Essentially, equity is the difference between your home's current market value and any amounts you owe on mortgages or liens. For instance, if your home is worth $400,000 and your remaining mortgage balance is $200,000, then you have $200,000 of equity.

These loans are usually given out in one large payment and often come with fixed interest rates. This fixed rate aspect makes it simpler for homeowners to manage their finances since they'll have predictable monthly payments throughout the loan term.

A home equity loan allows you to borrow money based on the value of your home, up to 80% or sometimes 85%, depending on the lender's policies and your financial situation.

This type of loan has a fixed interest rate, which means the rate stays the same for the entire duration of your loan. As a borrower, you'll make monthly payments that cover both the loan principal and the interest. The repayment period can vary widely, from five to 30 years. Generally, shorter loan terms and higher credit scores can secure you better interest rates.

When taking out a home equity loan, expect to encounter fees and closing costs that range from 2% to 5% of the loan's total amount. However, it's worth noting that some lenders may offer to waive these fees, reducing the overall cost of borrowing.

Home equity is determined by taking the difference between your home's current market value and the amount you still owe on your mortgage. Here's a straightforward example:

If your home is appraised at $350,000 and you have a remaining loan balance of $250,000, then:

Home Value−Loan Balance=Home EquityHome Value − Loan Balance= Home Equity,  $350,000−$250,000=$100,000 in home equity$350,000−$250,000=$100,000 in home equity

This $100,000 represents the equity you've built up in your home and potentially the amount you could borrow against. To easily figure out how much you might be able to borrow with a home equity loan, using a home equity loan calculator can give you a quick estimate.

Closing costs for home equity loans are additional charges incurred during the loan process, typically ranging from 2% to 5% of the amount borrowed. However, it's common for lenders offering home equity loans to waive these fees, making the loan more affordable for borrowers.

The closing costs associated with home equity loans share similarities with those for buying a home or refinancing a mortgage, but they tend to be lower in total. This is because the loan amount for a home equity loan is usually less than that for a home purchase or a cash-out refinance. Therefore, opting for a home equity loan might result in lower overall fees compared to a cash-out refinance, which involves closing costs on both the existing mortgage and the additional borrowed equity.

Typical fees involved in a home equity loan's closing costs may include an appraisal fee to determine your home's current value and an origination fee for processing the new loan. Other potential fees might cover document preparation, credit report checks, and title search to ensure there are no legal issues with the property's ownership.

To qualify for a home equity loan, lenders typically look for candidates who demonstrate financial responsibility and low risk. While specific requirements can vary, here are common criteria that most lenders expect:

• Credit Score: A minimum score of 620 is generally required, though some lenders might ask for at least 680.
• Income Stability: Evidence of a stable and sustainable income over the past two years.
• Equity: You should have at least 80% equity in your property, meaning only 20% of your home's value is owed.
• Debt-to-Income Ratio: Your DTI ratio should not exceed 43%. This ratio compares your monthly debt payments to your monthly gross income.
• Financial History: Lenders will look for a track record of financial reliability.
• Homeowners Insurance: Proof that your home is insured.

Timeframe for Getting a Home Equity Loan:

The time it takes to secure a home equity loan can vary, largely depending on how prepared you are and factors beyond your control, such as the appraisal and underwriting process. Being organized and having all necessary documents ready can expedite the process. The underwriting phase can proceed smoothly if your financial situation is straightforward. However, requirements like having an attorney present at closing can introduce delays depending on their availability.

In the best-case scenario, closing on a home equity loan might take a couple of weeks. Yet, it's not unusual for the entire process to extend up to two months.

Pros of Home Equity Loans:

• Access to Equity: A home equity loan converts the equity you've built up in your home into cash, giving you a lump sum to use as needed.
• Flexible Use: The cash from a home equity loan can be used for a wide range of purposes, from funding education or home improvements to covering medical expenses.
• Fixed Interest Rates: These loans typically come with fixed interest rates, ensuring that your monthly payments remain constant over the life of the loan, making budgeting easier.

Cons of Home Equity Loans:

• Additional Mortgage: If you still have a balance on your original mortgage, a home equity loan essentially becomes a second mortgage, requiring you to manage and make payments on both simultaneously.
• Limited Flexibility to Borrow More: Once you receive a home equity loan, you can't simply borrow more money on the same loan if your financial needs increase; you would need to qualify for and secure an additional loan.
• Foreclosure Risk: Perhaps the most significant risk is that failing to meet home equity loan payments can lead to foreclosure, as your home is used as collateral for the loan.

To secure a home equity loan, here's a step-by-step guide to navigate the process smoothly:

Check Your Credit Score: Your credit score plays a crucial role in qualifying for a home equity loan and affects the interest rate you'll receive. Aim for a credit score of at least 620 to improve your chances of approval and secure a favorable rate. If your score is below this, you might still qualify, but likely at a higher interest rate, and you may need to show stronger financial credentials, like higher income or more equity in your home.

Shop Around for Lenders: It's essential to compare different lenders to find the best loan for your situation. While starting with your existing mortgage lender might seem convenient, exploring options from various lenders, including those specializing in home equity loans, can lead to more competitive terms. Remember that the availability of home equity loans can vary, with some lenders offering more flexibility or better rates than others.

Submit Your Application: After selecting a lender that fits your needs, complete the application process by providing all necessary documentation, which could include tax returns, pay stubs, and proof of homeowners insurance, among others. This step is crucial for lenders to assess your financial stability and the risk associated with lending to you.

Access Your Funds: Upon approval, you'll go through the closing process, which includes signing the loan agreement and any other necessary documents. After this, the loan amount will be disbursed to you. The timeframe from application to receiving funds can vary, typically ranging from two weeks to two months, depending on several factors, including how promptly you submit required documents and the lender's processing time.

Following these steps carefully will help ensure you get the home equity loan that best meets your financial needs and goals.

Choosing between a Home Equity Line of Credit (HELOC) and a home equity loan depends on your financial needs, spending habits, and goals:

HELOCs offer a flexible credit line, allowing you to borrow as needed up to a certain limit and repay, then borrow again. This flexibility is ideal for ongoing expenses or projects where the total cost might vary. However, HELOCs usually have variable interest rates, meaning your payments could increase or decrease based on market conditions. This could be a concern if you prefer predictable monthly payments.

Home Equity Loans provide a one-time lump sum, making them suitable for those with a specific borrowing amount in mind, such as for a large, one-time project. The fixed interest rate means your payment amount won't change over the life of the loan, offering stability and ease of budgeting.

Both options are considered second mortgages, so if you go with either, you'll have to manage two mortgage payments simultaneously. If this doesn't appeal to you, a cash-out refinance might be a better option. This involves taking out a new mortgage for more than you owe on your current one, paying off your existing mortgage, and using the remaining funds for your financial needs. This way, you only have one mortgage payment to manage, but it's essential to consider the closing costs and whether the new loan's terms are beneficial in the long run.

Accessing the equity in your home without selling it can be accomplished in several ways, each with its unique benefits and considerations:

Cash-Out Refinance

• What It Is: This involves replacing your current mortgage with a new one that's larger than the amount you owe on your home. You pay off your existing mortgage and any closing costs with the new loan, and the remaining balance is given to you in cash.
• Benefits: Ideal if you're unhappy with your current mortgage's terms, like a high interest rate or permanent mortgage insurance on an FHA loan. If you can secure a good rate, the benefits may outweigh the closing costs.
• Considerations: It's important to ensure the new loan's terms and costs are beneficial compared to your existing mortgage.

Home Co-Investing (Equity Sharing)

• What It Is: You sell a part of your home's equity to an investor in exchange for cash, which you can use for any purpose. This investor could be a company specializing in home equity investments.
• Benefits: No monthly repayments are required since it's not a loan. You settle the investment when you sell your home, refinance, or buy out the investor, with the payout adjusted for any increase or decrease in your home's value.
• Considerations: The investor receives a share of your home's appreciation, which could be significant depending on your home's value increase over time.

Home Equity Line of Credit (HELOC)

• What It Is: A revolving credit line secured by your home, allowing you to borrow amounts as needed up to a set credit limit. It operates similarly to a credit card but with your home equity as collateral.
• Benefits: Flexibility to borrow as needed with minimal closing costs, making it suitable for ongoing expenses like renovations. Early payments are often interest-only, providing payment flexibility.
• Considerations: The interest rate is variable, meaning your payments can fluctuate over time. This can lead to higher payments if interest rates rise.

Each of these options provides a way to tap into your home equity according to different needs and circumstances. Choosing the right one depends on factors like your current mortgage situation, financial goals, and how you plan to use the funds.