If you’re like many homeowners, you may have earned a meaningful amount of equity over the years. And while it certainly feels great to know your real estate investment has increased in value, have you considered how that equity could help you reach your financial goals? For example, tapping your home equity can enable you to complete a dream renovation — which may also add value to your home. Using your equity, you could also pay off high-interest debt or cover other major expenses.
There’s more than one way to tap the equity in your home; this article focuses on home equity loans, which are different from home equity lines of credit (HELOC).
What is a home equity loan?
A home equity loan is type of loan that is secured by your home, i.e., you are putting your house up as collateral. Because they are secured, these loans typically have fixed interest rates that are lower than those of an unsecured loan, such as a credit card or a personal loan, but it also means falling behind on your payments could mean the loss of your home. Funds are distributed in one lump sum with repayment terms that range from five to 30 years.
If you’ve heard of home equity lines of credit (HELOCs), you might be wondering how the two solutions compare. The primary differences are in how you get your funds and the interest rate.
|Home Equity Loan||HELOC|
|How funds are disbursed||One lump sum||Via periodic “draws” against your credit limit|
|Interest rate structure||Typically fixed interest rates||Typically variable interest rates|
How a home equity loan works
Most homeowners use home equity loans to pay for a large home improvement project, many of which can raise the resale value of the home. And, if the loan is used for home improvement, the interest paid may be tax deductible in certain circumstances. But home improvements aren’t the only thing you can do with the loan, you can also use the funds for debt consolidation, to make a major purchase, or manage an unforeseen financial emergency.
How much can you borrow with a home equity loan
To establish how much you may be able to borrow, lenders look at your combined loan to value (CLTV) ratio. Your CLTV equals your current mortgage balance plus a second mortgage, if you have it, plus your potential home equity loan amount, divided by the value of your home. For example:
Current mortgage balance
Second mortgage balance
Potential home equity loan amount
Current value of home
Lenders typically target a CLTV between 75-90%. In the example above, if you qualified for a CLTV of 80%, your home equity loan amount would increase to $190,000.
How long does it take?
It can take up to six weeks to complete the entire application and approval process.
The typical home equity loan application process requires verification of documents related to your income and debts, an assessment of your home’s value by an appraiser, and verification of property ownership documents, such as tax assessments and mortgage statements. It can take as long as four to six weeks to complete the entire process and gain access to the funds.
How much does it cost?
You can expect to pay 3-6% of the loan amount in fees.
There are generally costs associated with taking out a home equity loan, which typically equal about 3-6% of the loan amount. Commonly, you’ll pay an application fee, an appraisal fee, and closing costs to cover attorney fees, title search, title insurance, and taxes. In addition, some lenders will charge prepayment penalties if you pay off the loan during its early years.
How are funds disbursed?
You’ll receive the money in one lump sum and repay it with fixed monthly payments.
Funds are disbursed in one lump sum, usually directly to your checking or savings account. Since most home equity loans have a fixed interest rate, you’ll repay the principal and interest owed via equal monthly payments over the term of the loan. For example, if your total loan amount is $100,000 at a fixed interest rate of 7% over a five-year term, your monthly payment would be $1,980.
A smarter way to borrow against the equity in your home.
At Figure, we took the best aspects of a traditional home equity loan and home equity line of credit to make a unique home equity release product. The Figure Home Equity Line has a fixed interest rate* and gives you full access to your funds up front, while also enabling you to access additional funds once you start to pay down your original disbursement. Plus, we only charge an origination fee, and you’ll be able to access the full amount of your loan in as few as 5 days**. Learn more about Figure Home Equity Line and see if it could be a good fit for your financial goals.*The Figure Home Equity Line is an open-end product where the full loan amount (minus the origination fee) will be 100% drawn at the time of origination. The initial amount funded at origination will be based on a fixed rate; however, this product contains an additional draw feature. As the borrower repays the balance on the line, the borrower may make additional draws during the draw period. If the borrower elects to make an additional draw, the interest rate for that draw will be set as of the date of the draw and will be based on an Index, which is the Prime Rate published in the Wall Street Journal for the calendar month preceding the date of the additional draw, plus a fixed margin. Accordingly, the fixed rate for any additional draw may be higher than the fixed rate for the initial draw.
**Five business day funding timeline assumes closing the loan with our remote online notary. Funding timelines may be longer for loans secured by properties located in counties that do not permit recording of e-signatures or that otherwise require an in-person closing.