Home > Mortgages > What You Need to Know about Home Equity Loans

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A home equity loan is a method for borrowing money for big-ticket items, and understanding the facts about these tricky loans is crucial to helping you make the right decision for your finances.

If you’re considering taking out a home equity loan, here are 13 things you need to know first.

1. What Is a Home Equity Loan?

A home equity loan—or HEL—is a loan in which a borrower uses the equity of their house as collateral. These loans allow you to borrow a large lump sum amount based on the value of your home, which is determined by an appraiser, and your current equity.

Equity loans are available as either fixed- or adjustable-rate loans and come with a set amount of time to repay the debt, typically between 5 and 30 years. You’ll pay closing costs, but it’ll be much less than what you pay on a typical full mortgage. Fixed- rate HELs also offer the predictability of a regular interest rate from the start, which some borrowers prefer.

2. What Are Home Equity Loans Best For?

A home equity loan is generally best for people who need cash to pay for a single major expense, like a specific home renovation project. Home equity loans are not particularly useful for borrowing small amounts of money.

Lenders typically don’t want to be bothered with making small loans—$10,000 is about the smallest you can get. Bank of America, for example, has a minimum home equity loan amount of $25,000, while Discover offers home equity loans in the range of $35,000 to $150,000.

3. What Is a Home Equity Line of Credit?

A home equity line of credit—or HELOC—is a lender-set revolving credit line based on the equity of your home. Once the limit is set, you can draw on your line of credit at any time during the life of the loan by writing a check against it. A HELOC is similar to a credit card: you do not need to borrow the full amount of the loan, and the available credit is replenished as you pay it back. In fact, you could pay back the loan in full during the draw period, re-borrow the total amount, and pay it back again.

The draw period typically lasts about 10 years and the repayment period typically lasts between 10 and 20 years. You pay interest only on what you actually borrow from the available loan, and you usually don’t have to begin repaying the loan until after the draw period closes.

HELOC loans also sometimes come with annual fees. Interest rates on HELOCs are adjustable, and they are generally tied to the prime rate, although they can often be converted to a fixed rate after a certain period of time. You are also often required to pay closing costs on the loan.

4. What Are Home Equity Lines of Credit Best For?

Home equity lines of credit are best for people who expect to need varying amounts of cash over time—for example, to start a business. If you don’t need to borrow as much as HELs require, you can opt for a HELOC and borrow only what you need instead.

5. What Are the Benefits of Home Equity Loans and Home Equity Lines of Credit?

Beyond the access to large sums of money, another advantage of home equity loans and home equity lines of credit is that the interest you pay is usually tax-deductible for those who itemize deductions, the same as regular mortgage interest. Federal tax law allows you to deduct mortgage interest on up to $100,000 in home equity debt ($50,000 apiece for married persons filing separately). There are certain limitations, though, so check with a tax adviser to determine your own eligibility.

Because HELs and HELOCs are secured by your home, the rates also tend to be lower than you’d pay on credit cards or other unsecured loans.

6. What Are the Disadvantages of Home Equity Loans and Home Equity Lines of Credit?

The debt you take on from a HEL or HELOC is secured by your home, meaning your property could be at risk if you fail to make the payments on your loans. You can be foreclosed on and lose your home if you’re delinquent on a home equity loan, the same as on your primary mortgage. In the case of a foreclosure, the primary mortgage lender is paid off first, and then the home equity lender is paid off out of whatever is left.

If your home’s value declines, you may go underwater and owe more than the house is worth. The rates for HELs and HELOCs also tend to be somewhat higher than what you’d currently pay for a full mortgage, and closing costs and other fees can add up.

7. How Do I Determine My Equity?

If you’re interested in learning how to qualify for a home equity loan, first you need to determine how much equity you have.

Equity is the share of your home that you actually own, versus that which you still owe to the bank. If your home is valued at $250,000 and you still owe $200,000 on your mortgage, you have $50,000 in equity, or 20%.

The same information is more commonly described in terms of a loan-to-value ratio—that is, the remaining balance on your loan compared to the value of the property—which in this case would be 80% ($200,000 being 80% of $250,000).

8. How Do I Qualify for a Home Equity Loan?

Generally speaking, lenders will require you to have at least an 80% loan-to-value ratio remaining after the home equity loan in order to be approved. That means you’ll need to own more than 20% of your home before you can even qualify for a home equity loan.

If you have a $250,000 home, you’d need at least 30% equity—a mortgage loan balance of no more than $175,000—in order to qualify for a $25,000 home equity loan or line of credit.

9. Can I Get a Home Equity Loan with Bad Credit?

Many lenders require good to excellent credit ratings to qualify for home equity loans. A score of 620 or higher is recommended for a home equity loan, and you may need an even higher score to qualify for a home equity line of credit. There are, however, certain situations where home equity loans may still be available to those with poor credit if they have considerable equity in their home and a low debt-to-income ratio.

If you think you’ll be in the market for a home equity loan or line of credit in the near future, consider taking steps to improve your credit score first.

10. How Soon Can I Get a Home Equity Loan?

Technically, you can get a home equity loan as soon as you purchase a home. However, home equity builds slowly, which means it can take a while before you have enough equity to qualify for a loan. In fact, it can take five to seven years to begin paying down the principal on your mortgage and start building equity.

The normal processing time for a home equity loan can be anywhere from two to four weeks.

11. Can I Have Multiple Home Equity Lines of Credit?

Although it is possible to have multiple home equity lines of credit, it is rare and few lenders will offer them. You would need substantial equity and excellent credit to qualify for multiple loans or lines of credit.

Applying for two HELOCs at the same time but from different lenders without disclosing them is considered mortgage fraud.

12. What Are the Best Banks for Home Equity Loans?

Banks, credit unions, mortgage lenders, and brokers all offer home equity loan products. A little research and some shopping around will help you determine which banks offer the best home equity products and interest rates for your situation.

Start with the banks where you already have a working relationship, but also ask around for referrals from friends and family who have recently gotten loans, and be sure to ask about any fees. Experienced real estate agents can also provide some insight into this process.

If you’re unsure of where to start, here are a few options to review:

  • Lending Tree works with qualified partners to find the best rates and offers an easy way to compare lending options.
  • Discover offers home equity loans between $35,000 and $150,000 and makes it easy to apply online. There are no application fees or cash required at closing.
  • Bank of America offers HELOCs for up to $1,000,000 on a primary home, makes it easy to apply online, and offers fee reductions for existing bank customers, but it has higher debt-to-income ratio requirements than many other lenders.
  • Citibank allows you to apply online, over the phone, and in person for both HELs and HELOCs. It also waives application fees and closing costs—but it does charge an annual fee on HELOCs.
  • Wells Fargo currently offers only HELOCs with fixed rates, but the bank offers discounts for Wells Fargo accountholders, as well as reduced interest rates if you cover the closing costs.

13. How to Apply for a Home Equity Loan

There are certain home equity loan requirements you must meet before you can apply for a loan. For better chances of being approved for a loan, follow these five steps:

  1. Check your current credit score. A good credit score will make it easier to qualify for a loan. Review your credit report before you apply. If your score is below 620 and you’re not desperate for a loan right now, you may want to take steps to improve your credit score before you apply.
  2. Determine your available equity. Your equity determines how big of a loan you can qualify for. Get a sense of how much equity your home has by checking sites like Zillow to determine its current value and deducting how much you still owe. An appraiser from the lending institution will determine the official value (and therefore your equity) when you apply, but you can get a good sense of how much equity you may have by doing a little personal research first.
  3. Check your debt. Your debt-to-income ratio will also determine your likelihood of qualification for a home equity loan. If you have a lot of debt, you may want to work on paying it down before you apply for a home equity loan.
  4. Research rates at different banks and lending institutions. Not all banks and lending institutions require the same rates, fees, or qualifications for loans. Do your research and review multiple lenders before starting the application process.
  5. Gather the required information. Applying for a home equity loan or line of credit can be a lengthy process. You can speed things up by gathering the necessary information before you begin. Depending on which lending institution you are working with, you may need to provide a deed, pay stubs, tax returns, and more.

If you need a loan to help cover upcoming expenses, make sure you’re prepared. Check out our Loan Learning Center for more resources on the different types of loans available.

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  • http://www.credit.com/ Credit.com Credit Experts

    How would the bank know? The bank is interested in your paying back the money you borrow.

  • Julie Davenport

    It says there are 5 things to know, but only states 4. What’s the 5th?

    • http://www.credit.com/ Credit.com Credit Experts

      The first is in the introduction — the fact that HELOCs are opening up.

  • Equity Research Lab

    Blogger’s brilliant Efforts are really appreciable. Anyone can easily understand the thoughts. Also I like the conclusions made on
    this topic which is really very informative.!!!!!!!!!
    Equity tips

  • Steve

    Is it possible to get a HELOC with a financial institution other than the bank that holds the mortgage?

    • http://www.Credit.com/ Gerri Detweiler

      Absolutely.

  • X

    Can you pay off a personal loan with a HELOC?

    • http://www.Credit.com/ Gerri Detweiler

      Yes.

  • pipewelder

    Can you use your home equity load for the purchase of an automobile or does it have to be used to improve your home?

    • http://www.credit.com/ Credit.com Credit Experts

      Generally you can use it however you like. A home improvement loan would have to be used for home improvement. But home equity loans have been used to pay for many other things (tuition, cars, adoption and more).

  • fredy

    Question?? Can you get a home equity loan if you have equity but not full time employment?

    • http://www.Credit.com/ Gerri Detweiler

      It can be challenging, but not impossible. Have you talked with a lender? If not, that is the next step we recommend.

  • codye

    can you take a equity loan out if you owe back taxes on the house

  • Edward A

    Can I cosign a HELOC or home equity loan for my father? Please note that the home is only under his name. Any advice or suggestions will help! Thank you in advance!

    • http://www.Credit.com/ Gerri Detweiler

      The lender may be willing to permit you to cosign. You’ll need to talk with them.

      What about a reverse mortgage for your father? Perhaps that’s a better option?

  • Ang

    If I have a house that is worth 140,000 and need to buy someone out but have bad credit. Can you use the 50% equity to get a loan? Only need $70,000 to buy out. Is it possible to raise your credit score within 6 months?

    • http://www.credit.com/ Credit.com Credit Experts

      You would have to check with your lender about using the house as collateral. And yes, it is possible to raise your credit score within 6 months. First, find out what’s holding it down. THOSE are the factors you need to address first. You can get a free credit report card from Credit.com, and it includes personalized suggestions for improving credit.

    • http://www.Credit.com/ Gerri Detweiler

      I am not sure I understand your scenario. But generally lenders still require minimum credit scores and proof of income (ability to repay the loan) to get a home equity loan. So you will have to qualify if you want to try to tap your equity. Have you talked with a lender?

  • Anna Monteleone

    Hi, I have been recently widowed,I own my home,no mortgage, at this time I am drowning in debt,,would like to draw on equity ,I haven’t found a job yet ,but I have a co signer,had excellent credit but it’s starting to turn..approved any suggestions?

    • http://www.Credit.com/ Gerri Detweiler

      Anna – We’re sorry to hear of your loss. You may be feeling overwhelmed right now, but before you start taking money from your home equity will you consider talking with a bankruptcy attorney AND a credit counselor to see if you have other options? You may be able to reduce the debt without putting your home equity at risk. Another option, if you are age 62 or older, is a reverse mortgage. But please talk with a professional to make sure you make the best decision for the long run. This article may help:
      6 Places to Get Free Help With Your Credit Problem

  • Shar

    Can someone get a loan on a paid off home , that only owns 50% of the home?

    • http://www.credit.com/ Credit.com Credit Experts

      Could you re-state the question? Not sure we understand exactly what you are asking.

  • Cardinal AK

    Can you get a home equity loan if you have a lien on the house; such as a judgement?

    • http://blog.credit.com/ Kali Geldis

      Hey Cardinal —

      That may prove difficult, as your credit score will list liens and creditors may not be as at to lend to someone with one. However, each situation is different — your best bet is to get a copy of your free annual credit reports and take them into your bank of choice. A loan officer who can see your credit report can look at the big picture and tell you whether you’d stand a good chance of qualifying (and they can talk to you for free!)

      Here’s hoe to get your free annual credit reports:
      http://www.credit.com/credit-reports/free-annual-credit-report/

  • Michael Hahn

    Three Questions:
    1 – Paid off 50 percent of the original Home Equity Loan. Can I know convert it to a standard mortgage to regain an ag exemption?

    2 – Can just my wife now purchase our house at a set price above what we owe (assuming her income and credit qualify her), without me signing the loan, but just any other deeds, etc. required. Or not sign those if we so choose.

    3 – I have a S-Corporation. Could it purchase our property with a standard mortgage, even though I own the S-Corp?

  • Seth Bevans

    I am not sure I totally understand how equity works. I am purchasing a house that is appraising for 205,000.00, but only paying a 116,500.00 for it. I would like to add another bathroom to it, but to stipulations in out loan, I cant do it with the purchasing loan. But with the difference in appraisal, and a purchase price does that mean I have 88,000 in equity to begin with. I always thought time lived there counted too? Please help I am a bit confused.

    • http://www.credit.com/ Credit.com Credit Experts

      Speak with your lender about your options. Different programs may offer you different ways to do this — and it may turn out that buying the home, closing and then taking out a home equity loan (or line of credit) to add the bathroom is the way to go

  • http://www.newteethnow.com/ Courtney Matthews

    Excellent post. I would definitely suggest speaking with your lender and ask a lot of questions!

  • Christy Greene

    I would like to have some extra cash just like all of us would! I paid $92,000 for my house and I put $18,000 down. I’ve lived here for 10 years and my monthly mortgage payments are about $680 and that’s with the home insurance and property fees included. About 5 yrs ago i tried to get a 2nd mortgage or home equity loan through same bank I make my mortgage payments to. But they denied me saying I was late too many times making my monthly payments. I’ve now been paying them on time but my credit score is bad. Should I try to go back to same bank to get a loan? Will II even be able to get a loan with bad credit but the good thing is I’ve lived in same house for 10 yrs! So that’d have to help wouldn’t it? If anyone can give me any advice I’d appreciate it!!

    • http://www.credit.com/ Credit.com Credit Experts

      A better move is to improve your credit score. Here are some tips: How to Rebuild Credit

  • Travis George

    I own the home and work full time. My credit score is bad, could I be eligible for an equity loan. I don’t have any liens just some mistakes from the past. My bank denied for a personal loan but said it would a better option would be an equity loan. If they denied for the personal loan wouldn’t they also deny me for the equity loan?

  • Aaron Bogale

    currentley i have an equity line of credit established.i need this because i awant to finance my daughter education.the college want this in lquid form can i draw all the money put it in checking account so that the college see it as liquid is there a downside to this strategy thank you

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