How long does a home equity loan take to get?
Getting a home equity loan can take anywhere from two weeks to two months, depending on your preparation of documents (such as W2s and 1099 tax forms and proof of income), your financial situation, and state laws. The home equity loan process time varies from lender-to-lender. During the home equity loan process time you’ll need to get a market value appraisal of your home, which could take a week or two.
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What is a home equity loan?
A home equity loan is a type of loan that lets you borrow money against the equity in your home. The amount of equity you have is determined by the difference between your house’s market value and the remaining mortgage you owe.
To calculate the equity in your house or the amount of money you are qualified to borrow, estimate your home’s market value, and subtract your remaining mortgage balance from it to arrive at this amount.
For example, if your house is valued at $500,000 and you owe $140,000 for your mortgage credit, and your lender offers you 80% of the home’s loan-to-value ratio, 80% of $500,000 will be 400,000. Subtracting your mortgage amount will give you a value of $260,000. This is your equity, i.e., the most you can borrow.
Upon approval of your home equity loan, a lump sum will be paid to you to use any way you choose.
Home equity loan requirements
How soon can you get a home equity loan depends on how prepared you are and meeting the lender’s loan requirements.
As with other types of loans, home equity loans have specific qualification requirements you will need to fulfill before being approved for the loan.
The standard requirements include:
- A debt-to-income ratio of 43% to 50%. Lenders will ask to see your W2s or 1099s and use these to evaluate your debt-to-income ratio and your ability to repay the loan.
- A minimum credit score in the mid-600 range.
- Reliable Payment History. Have you paid your current mortgage on time, or do you have missed or late payments? Lenders want to know you’re a reliable borrower before they approve the loan.
- Home equity of at least 15% to 20%.
How to get a home equity loan
- Shop different lenders. Start with your local credit unions and banks. Compare interest rates and terms.
- Gather necessary documents. If you’re ready to move forward with a loan application, be sure to have your W2s or 1099s. You may be asked to show proof of payments on your current mortgage loan and other debts. The lender will ask for permission to run your credit score.
- Apply. You may be able to apply online and upload the necessary documents. Or you may apply in-person at the credit union or bank of your choice.
- Get an appraisal. The home equity loan process time can be affected by how quickly you can get an appraisal. Most lenders will require an appraisal to determine the value of your home. The loan amount you qualify for will largely be based on your home’s appraised value.
- Underwriting. During the underwriting process the lender reviews all the information you’ve submitted as part of your application, including the appraisal, your credit score, your payment history, and your debt-to-income ratio.
- Close. If you are approved, you will have a loan closing where the loan documents are signed in the presence of a notary. You may or may not need an attorney, depending on the laws of your state.
- Receive your funds. Once approved for the loan the money will be deposited into your checking or savings account.
How fast can you get a home equity loan?
The home equity loan process time depends on several factors, but generally can take anywhere from two weeks to two months. These factors most affect how soon can you get a home equity loan:
Preparation.
Preparing your documents ahead of time can speed-up the loan application process. This means having your W2s or 1099s showing your income, proof of income, property tax statement and other information handy. Ask your loan representative for a document checklist so you can start preparing.
Complexity of financial situation.
If you’ve paid your current mortgage on-time and have your documents in order, the application and underwriting of your loan should move quickly.
Timing of appraisal.
Sometimes it takes time to find and hire an appraiser, then wait for the appraisal report. This part of the process could take a week or two.
Timing of closing.
The lender will likely require you to appear in-person for the closing, where you will sign the loan commitment documents. You may choose to hire a real estate attorney, but it is not required. Hiring a lawyer to review the terms of the loan commitment documents, prior to signing could be helpful and make you aware of any conditions you may have overlooked.
Pros & Cons of home equity loans
Here are the
pros and cons of home equity loans:
Pros
Fixed interest rate. Unlike a home equity line of credit (HELOC), a home equity loan has a fixed interest rate for the duration of the loan. This makes monthly budgeting easier because payments are predictable.
Flexible spending. Use the money any way you want.
Lump sum payment. If you need a lot of money all at once to make a large purchase or to do a home renovation or remodel project, a lump sum is very convenient to have.
Long repayment terms. Home equity loans have terms that range from five to 30 years.
Better than refinancing. Getting cash through a mortgage refinance requires that homeowners get a new mortgage at a new interest rate. If you have a low interest rate that is lower than the current interest rates, you’ll save more by keeping your current rate. Closing costs can be high, which makes getting cash more costly as well.
Lower borrowing costs. Home equity loan interest rates tend to be lower than HELOC rates.
Interest payments may be tax deductible. According to the
IRS, interest paid on home equity loans and
home equity lines of credit is deductible when you use the proceeds to buy, build, or substantially improve your home that secures the loan.
Usually easy to get. Borrowers with a good credit score, the right amount of home equity and the ability to repay the loan are good candidates for a home equity loan and can often get approved quickly.
Cons
Higher interest rate than a HELOC. Home equity loans tend to have a higher interest rate than home equity lines of credit, so you may pay more interest over the life of the loan.
Your home will be used as collateral. Failure to make on-time monthly payments will hurt your credit score. If you default on the loan, the lender can take possession of the home through a foreclosure.
Closing costs. Most home equity loans have closing fees, which may include an application for loan processing fee, appraisal fee, origination or underwriting fee, lender or funding fee and recording fees, to name a few.
Two mortgage payments. Whether or not you use the money given to you in a home equity loan, the lender will expect you to pay monthly interest on the total loan amount. If you have used any part of the loan, your monthly payment will include interest and principal.
FAQs
What can a home equity loan be used for?
Home equity loans can be used for a variety of things; however, home equity loans should be used for making purchases that increase your home’s value or improve your financial situation. Some examples of home equity loan uses include home renovation, paying emergency medical bills, renovating your home, or paying-off high-interest debt.
Can I use a home equity loan to pay off a mortgage?
Using a home equity loan to pay off a mortgage to pay off your mortgage could work if you are able to borrow more than you owe on your current mortgage. Also consider the interest rate. If the home equity loan interest rate is higher than the interest rate you currently have on your mortgage, then using a home equity loan to pay off your mortgage is not a good idea, as you will end up paying more in interest.
Can you pay off a home equity loan early?
Payoff rules and requirements will vary from lender-to-lender. As you shop and compare lenders and loans, be sure to ask if there is a pre-payment penalty for paying off the full loan amount before the end of the term.
How do home equity loans compare to HELOCs?
A HELOC gives you access to a certain amount of money during a draw period and typically has a variable interest rate that’s charged only against the amount of money that you use. A home equity loan provides you with a lump sum of money at closing, and you’ll start paying interest on the full amount whether you draw from it or not. Home equity loans have a fixed interest rate charged on the entire lump sum amount, whereas HELOCS charge a variable interest rate on only the amount of money you use.
How do I build equity in my home?
One of the best ways to build equity is to make extra payments toward your principal loan amount. As you pay down your mortgage your equity (the amount you own outright) will increase.
How much can you borrow on a home equity loan?
The amount you can borrow will largely depend on how much equity you have in your home, in addition to factors including your credit score, your home’s appraised value, and your debt-to-income ratio.
Does getting a home equity loan increase my mortgage payment?
A home equity loan is sometimes referred to as a second mortgage because it’s granted based on the equity in your home and requires a monthly re-payment of the loan amount. However, a home equity loan will remain separate from your first mortgage and not affect it in any way.
Are home equity loans worth it?
One of the advantages of getting a home equity loan is access to a large sum of cash. Another advantage is a fixed interest rate, which means predictable payments. As you weigh the
home equity loan pros and cons, consider these disadvantages of a home equity loan: borrowers are required to start paying interest on the full loan amount right away, even if the loan is not being used. Plus, some lenders will charge an “inactivity fee” for loan accounts that aren’t actively used.
Why Savvy Consumers Choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including HELOCs, car loans, personal loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with one of our home equity loan experts.
Get Started on Your Home Equity Loan Today!