Learn more about using home equity through these frequently asked questions.
From questions like what is a home equity loan to comparing home equity loans vs. lines of credit, these FAQs will give you a better understanding of home equity financing to help you make the right borrowing decision.
- A home equity loan has a fixed-rate. A line of credit has a variable interest rate that adjusts with the Prime Rate.
- With a home equity loan, you make fixed payments of principal and interest. With a home equity line of credit, you only need to make interest payments during the draw period.
- With a home equity loan, you get the entire loan amount in one lump sum. By contrast, a line of credit is available for a long-term draw period, which you can access with home equity line of credit checks or through online banking. If you pay down principal during your draw period, you can borrow that principal again if you want to.
Understanding rates is important when you’re trying to understand what a home equity loan is and how it is different from a line of credit. Fixed-rate loans (a home equity loan) have interest rates that don’t change during the life of the loan. Adjustable-rate loans (a home equity line) have rates that are linked to an index, such as Prime or LIBOR, and therefore can change over time.
With a home equity line of credit (HELOC) you are only required to pay interest on the outstanding principal balance during the draw period. You can make principal payments during the draw period, but they aren’t required. If you do repay principal during the draw period, those funds can be borrowed again. Home equity loans on the other hand require a fixed monthly payment of both principal and interest.
Just like with points, pre-approvals are typically only available for mortgages and not for home equity loans or lines of credit.
We almost always require an appraisal to qualify for a home equity loan or line of credit. After we review your application and collateral information, we will determine the type of appraisal needed and talk to you about how it will get done.
That depends mostly on you. Be sure to promptly respond to any requests we make for additional documents needed to complete your application. Typically it takes about 45 days from application to funding, but can vary depending on your individual situation.
Points are a one-time fee that you can pay to lower your loan’s interest rate. One point equals one percent of your loan amount. Points are typically available for mortgage loans and not home equity loans or lines of credit.
The interest rate is the cost to actually borrow the money disbursed in the loan. The APR (annual percentage rate) adds in some of the upfront costs of getting the loan in addition to the interest, including any lender fees.
Typically our home equity loans and lines of credit do not have any closing costs*. However, for a home equity line of credit, if your property is held in trust or in a LLC, there are review fees ranging from $85 to $350.
Home equity lines of credit require interest-only payments during the initial draw period. After the draw period both principal and interest payments are required on the outstanding balance. Home equity loans are paid in full over the life of the loan, in equal monthly payments that contain both principal and interest. For both home equity products, you can always make additional payments toward principal.
PMI is not required for a home equity loan or home equity line of credit.
Determining equity is simple. Take your home’s value, and then subtract all amounts that are owed on that property. The difference is the amount of equity you have.
To determine your home’s value, use your best guess or find a home value estimator. We can also help you determine your home’s current worth.
Ex: If you have a property worth $200,000, and the total mortgage balances owed on the property are $120,000, then you have a total of $80,000 in equity.
LTV stands for loan-to-value. It is the total amount of liens on the property divided by its fair market value.
LTV is used to determine how much you are eligible to borrow and is one of the factors used in determining your interest rate. A lender typically allows you to borrow up to 80% LTV. The lender will multiply the lower of the purchase price or the estimated market value by 80%, then subtract the outstanding liens on the property. The remaining balance represents your available equity. Keep in mind that LTV requirements may vary by state and lender.
Ex: Using the example from the FAQ above, if a lender typically allows you to borrow up to 80% LTV, then you would be eligible to borrow $40,000 in equity.
Using the equity in your home is a great way to improve your property, consolidate high-interest debt, finance important life events, or even cover unexpected emergencies. The interest rate you get is often lower than with unsecured loans. (Refer to other home equity loan FAQs and resources for additional information)
And interest you pay is often tax deductible. (Consult a tax advisor for more information.)
When you first apply for a home equity loan, just take your best guess as to your home’s value. If you want to try to be more specific, you can use a home value estimator or talk to a Home Loan Originator for other methods of trying to determine this amount. However, we will determine the value during your application process.
Interest you pay on a loan that is secured by your primary residence may be tax deductible. Consult with a tax advisor to determine whether the interest you pay is eligible.
When reviewing your application information, an underwriter examines three main factors to assess whether you qualify for the loan and is also used to determine your interest rate:
- Your credit history (FICO score)
- Your loan-to-value ratio
- Your debt-to-income ratio
There’s no way to say what your exact interest rate will be on your home equity loan or line of credit until your application is completed, but we will give you our best estimate based on preliminary factors. Your final interest rate is based on factors such as your credit history (FICO score) and ability to repay, the value of your home and the loan or line amount, to name a few.
The two biggest factors when borrowing a home equity loan or line of credit are the amount of equity you have in your home and your credit score. Another factor is your debt-to-income ratio (how many bills and obligations you have compared to your income). To calculate your debt-to-income ratio, write down all of your monthly debts (don’t worry about utilities or your television service), then divide that amount by your monthly gross income. This will give you a general estimate of your debt-to-income ratio.
If your credit score is high you may receive better rates and have more options available to you taking out a home equity loan or line of credit. But simply having some credit issues in the past won’t necessarily disqualify you from getting a loan or a line. However, your credit history needs to demonstrate both willingness and ability to repay on time.