How to Secure a Home Equity Loan

A home equity loan is a secured second mortgage with a fixed simple interest rate, in which the homeowner utilizes their home equity as collateral. Borrowers love the fixed-rate home equity loan to pay for significant expenditures like home remodeling, automobile purchases, debt consolidation, medical bills, 2nd home down-payments, or college expenses. 

Are you considering the option of a home equity loan and want to know the details?

A home equity loan represents a secondary mortgage that provides you with a lump-sum payment, equivalent to a portion of your home’s equity, which you can utilize according to your preferences. 

The borrowed funds come with a low, fixed interest rate, and you repay them monthly over a 15, 20, or 35-year period. The risk with a equity home loan is that its’s secured by your property, so if you do not make the payments, the bank can foreclose and take your home.

Learn More

The equity loan amounts ranges depending on what you qualify for.

Home equity lenders will consider your credit history, debt-to-income ratio, income and job history. Most lenders typically cap the loan amount at 80% of your home’s equity, but if you have a good credit score, some home equity loan lenders will allow you to borrow between 90 and 95% combined loan to value (CLTV)

This equation takes your existing balance on the primary mortgage, then adds the home equity loan amount and divides that sum by your property’s appraised value. It is important to know that the more you borrow, the higher your monthly payments will be.

Learn More

Homeowners love the fixed-rate home equity loan to pay for significant expenditures like home renovations, medical bills, or higher education costs.

A home equity loan represents a secondary mortgage that provides you with a lump-sum payment, equivalent to a portion of your home’s equity, which you can utilize according to your preferences.

The borrowed funds come with a low, fixed interest rate, and you repay them monthly over a 15, 20, or 35-year period. The risk with home equity loans is that its’s secured by your property, so if you do not make the payments, the bank can foreclose and take your home.

How Does a Home Equity Loan Work?

Upon obtaining a home equity loan, the lender sanctions a loan amount determined by factors such as the percentage of equity in your home. The home equity loan works like a typical installment loan in which the proceeds are disbursed in a single lump sum, and you subsequently repay the borrowed amount through consistent fixed monthly installments, covering both principal and interest, over a predetermined period. While the terms may differ, home equity loans typically offer repayment periods extending from 10 to 30 years. Read more about current lending requirements for home equity loans and credit lines.

Home Equity Loan Versus Cash Out Refinance

Both cash-out refinances and home equity loans allow you to convert home equity into cash, with the interest repaid potentially being tax deductible when used for home improvement. Nevertheless, these financial products vary in their structure, repayment terms, and associated costs.

Cash Out Refinance Benefits

A cash-out refinance offers a convenient solution for financing substantial expenses and consolidating your mortgage into a single payment. With interest rates typically lower than those of best home equity loans due to being the primary lien on your property, cash-out refinances may also have more lenient credit score requirements compared to equity home loans. Depending on the loan type, some borrowers may have the opportunity to access a greater amount of equity.

In summary, cash-out refinancing may be the optimal choice if you can refinance without increasing your interest rate, wish to modify your loan terms (such as transitioning from a 15-year to a 30-year loan), or do not qualify for a competitive home equity loan rate.

Home Equity Loan Benefits

Home equity loans provide an opportunity to leverage home equity while keeping your existing mortgage unchanged. This becomes particularly advantageous when current interest rates are higher than those at the time of your initial mortgage. Additionally, home equity loans generally offer a faster application process and involve fewer closing costs compared to refinance loans.

Conversely, opting for a home equity loan introduces an additional debt obligation, potentially putting your home at risk of foreclosure if payment difficulties arise. Interest rates on home equity products tend to be higher than those on cash-out refinances and home purchase loans, with HELOCs carrying the added possibility of rate and payment increases.

Home Equity Line of Credit Versus Home Equity Loan

Both the home equity loan and the home equity line of credit fall under the category of second mortgages. However, notable distinctions exist between the two, primarily concerning how credit is extended and the nature of the interest rate. This second mortgage provides a single lump sum that is repaid with a fixed interest rate home equity loan. On the other hand, a home equity line of credit or HELOC offers a flexible line of credit that can be utilized as necessary within a specified timeframe, often featuring a variable interest rate.

In contrast to the fixed lump sum of a home equity loan, a Home Equity Line of Credit offers versatility. Although there is a total loan amount, you only borrow what you require, subsequently paying it off and having the option to borrow again. This implies that repayment for a home equity line occurs incrementally based on the utilized amount, akin to a credit card, rather than on the entire loan amount.

Another crucial distinction is the prevalent use of adjustable rates in HELOC loans. The interest rate for a HELOC may fluctuate during the loan’s duration, introducing an element of unpredictability to your payments. While HELOC rates may initially be discounted, typically in the initial six to 12 months, they often rise afterward. If you are drawn to the steady payments of a home equity loan but desire the flexible borrowing aspect of a home equity line of credit, exploring lenders offering home equity credit lines with fixed-rate options might be worthwhile. In most cases, HELOCs have variable interest rates for the duration of the draw period.

In the case of a cash-out refinance, your existing mortgage is replaced with a new, larger loan, allowing you to access the difference in funds. This implies a new interest rate on your primary mortgage, which may not be ideal if rates have increased since your home purchase. Additionally, you will incur closing costs as part of this refinancing process.

Get Quote

Home Equity Loan Versus Personal Loan

A personal loan and a home equity loan share significant characteristics. In both financing options, you can typically secure a substantial amount of money, utilizing the funds for major expenses, debt consolidation, or home improvements. Furthermore, both options provide the flexibility of receiving a lump sum deposited into your checking account, allowing you to use the funds for a variety of purposes.

However, distinct differences exist between a personal loan and a home equity loan, and careful consideration is essential when deciding which aligns with your specific situation. Here are five of the most notable distinctions.

Best Use of Home Equity Loans in 2024

In 2024, interest rates are much higher than three years ago. The Federal Reserve has raised rates 11 times since 2022 to tame inflation. These rate increases mean that interest rates have soared on credit cards to over 20% for many people. First mortgage rates are approximately 7% in early 2024, too. With higher rates, what is the best way to get low-interest cash for large expenses?

Many homeowners turn to an equity loan to get the cash out they need. Learn more about equity home loans in this post, and then talk to one of our loan professionals if you have questions or want to apply.

Home Equity Loan Overview
A home equity loan allows you to tap equity in your home without disturbing your first mortgage. It’s a second mortgage that lets you borrow a lump sum against the equity that you have accumulated in the home. The best home equity loan has a fixed interest rate in the 7% or 9% range, which is much lower than most credit cards. Don’t forget that credit cards typically have variable interest rates as well.

Home equity is the difference between what you owe on your home and how much the home is worth. With this loan, you can transform your equity into cash that you can use today instead of when you sell the home. If you get a equity home loan, you can usually borrow between 80% and 90% of the home’s value.
Most lenders will require you to have at least 20% equity in the home to qualify. Also, many homeowners put down close to 20% to buy their home, so they probably qualify for a home equity loan right away. But if you put down less than 20%, you may need to wait two or three years to qualify for this loan.
Homeowners in the US saw almost 16% more home equity than last year, so even if you made a small down payment to buy your home, you still may have enough equity to get a loan.

The average homeowner in America has almost $200,000 in tappable home equity per borrower, according to mortgage technology company Black Knight. So, many Americans have money in their homes that they can use for many reasons.

Here are some of the most popular uses of home equity loan cash in 2024:

Doing Home Improvements
One of the most popular ways to use a home equity loan is to do home improvements. Many people have seen a jump in their home values in the COVID era, which has spurred them to take out second mortgages and improve their homes. A home improvement project can make your home a nicer place to live in and also boost the resale value. This could be a boon for your family when you ultimately sell the home. If you do a renovation of the kitchen in the $20,000 to $40,000 range, for example, it could add thousands to the home’s value.

Paying Off High Interest Debt
The Federal Reserve has been on a mission in the past two years to tame inflation. The Fed has jacked up rates 11 times since 2022 to slow inflation. There are signs that inflation is slowing to approximately 3% at the end of 2023.
Reducing the inflation rate comes at a cost, however: Higher interest rates for most loans, including credit cards. The average credit card rate is approximately 21%. This means if you have $10,000 in credit card debt, you could pay thousands per year in interest.
A better option could be to get a home equity loan with an average rate of 9% or so. This could help you to save a lot in interest if you use the money to pay off your credit cards. However, you should remember that you are using your home’s equity to pay off debt which means you need to pay the loan or you could lose your home.

Start a Business
Starting your own business is still part of the American dream for many people. But starting a business usually takes capital. If you have $100,000 or more in home equity, you could use the money to fund a variety of new businesses. Most equity home loans have lower rates than business loans.
Another possibility is to use home equity to invest in rental properties. Some homeowners use their equity to fund down payments and renovations on several rental homes. Or, you can use the money to pay for the home in full. Just be careful that you don’t pay more than you should for any rental property, and have the renovations done affordably.

Pay For a College Education
Higher education is often a good investment in your or your child’s future. College costs are on the rise and paying for a four-year degree can cost hundreds of thousands of dollars.
A home equity loan could be a wise alternative to many private student loans. If you choose a longer term for the home loan, you could have a lower payment than for many student loans. However, before you use home equity, try to get as much federal student aid as you can.

Setting Up an Emergency Fund
You should have an emergency fund to pay for at least three months of expenses. If you don’t have one set up, you could use a home equity loan for an emergency fund. However, you should still work to save enough money in cash for your emergency fund.

Wedding Expenses
The average wedding cost in 2023 was $30,000. For some families, it may make sense to take out a home equity loan and pay for this expense. A wedding loan is a possibility, but it is an unsecured debt and carries a high interest rate. Of course, taking out a home equity loan to pay for a wedding means you are putting your home at risk. Be sure that you have the ability to pay for the loan or you could lose the home.

What Are Home Equity Loan Rates In 2024?

The interest rates on home equity loans are based on the prime rate. This is the lowest rat that a mortgage lender can offer to the most highly-qualified borrowers. But most mortgage lenders will include a margin to calculate their rate to you. So, if the lender adds a 1.5% margin to a prime rate of 7.75%, your home equity loan rate would be about 9.3%. The margin that the lender adds will vary, so you should look around. Also, your final rate will vary based on your credit score, amount borrowed, and debt-to-income ratio.

There is a possibility that interest rates will begin to drop in 2024. Inflation has started to slow, which means the Fed may not raise rates in the near future. They could even begin to drop rates, which could cause mortgage rates to drop this year. 

However, it will take a year or two for mortgage rates to decrease appreciably. So, many homeowners are taking advantage of the relatively low home equity loan rates to get the money they need today. If interest rates do decline in the next two years, it is always possible to refinance your home equity loan. Another possibility is to get a home equity line of credit with a variable interest rate that will adjust if rates drop.

With home equity loan rates higher than three years ago, many homeowners look for the best way to get the cash they need at a low rate. A home equity loan offers a fixed rate option to get the cash you need at a reasonable rate. You can use your home equity loan cash for anything from home renovations to college expenses to paying off those high credit card bills. Get started with the best home equity loan rate today by speaking to a loan adviser today! They’ll tell you how much money you can qualify for and what the rate could be, and much more. In some cases, the home equity investment program may be a good opportunity.

Apply now

Credit Qualifications for Home Equity Loans

It’s worth noting that eligibility criteria can vary between home equity lenders, but there are common requirements: You should have at least 15% or 20% equity in your home, as a greater equity stake often translates to lower interest rates, which presents less risk to the lender.

580 to 600

Credit score

is expected for a bad credit home equity loan. (max 80% CLTV)

601- 639

Credit score

is expected for a fair credit home equity loan. (max 85% CLTV)

640- 699

Credit score

is expected for a good credit home equity loan. (max 90% CLTV)

700- 800

Credit score

is expected for an excellent credit home equity loan. (max 95% CLTV)

Most home equity lenders are looking for a debt-to-income ratio (DTI) of 43% or lower. For borrowers with below average credit most lenders will prefer a DTI below 40%. Lenders that offer home equity loans typically require a current appraisal to verify that your home’s value matches the amount you wish to borrow, in addition to your current mortgage balance.

Apply now

Why Taking Out a Home Equity Loan May Be Your Best Financial Option for Cash Out in 2024

Consider these five lending options where a home equity loan could prove more advantageous.

Cash-Out Refinancing: – Home equity loans allow access to funds without altering favorable mortgage terms, making them preferable if you have a mortgage with an interest rate of 4.00% or less.

HELOC: – Home equity loans offer upfront large sums with fixed interest rates, providing predictability compared to variable rates associated with HELOCs.

Personal Loans: – Home equity loans often provide lower interest rates and higher borrowing limits (up to 75-85% of home equity) compared to personal loans, making them beneficial for significant debt consolidation or large home improvement projects.

Credit Cards – With a current average interest rate of 8.8%, home equity loans offer substantial savings compared to credit cards with an average rate of 22.75%.

401k Loans: – The 401k loan should be consider if you meet the eligibility requirements. Their is opportunity cost with a 401k loan that you cannot overlook. Potentially there is loss of interest and employer matching contributions.

Don’t forget that taking out a home equity loan can be a more favorable option in various scenarios, but it’s essential to weigh the risks and benefits carefully. Evaluate each option based on your unique circumstances, read the fine print, and ensure that any new debt is comfortably manageable before proceeding.