How Long Does It Take to Get a Home Equity Loan?

Article Summary:

It takes anywhere from two to four weeks to get a home equity loan or a HELOC. Various factors can impact the length of the application process, such as your debt-to-income ratio, credit score, and the loan-to-value ratio.

Home equity loans are a popular financing option for homeowners because they offer relatively low-interest rates and can be used for many purposes. This includes home improvements, debt consolidation for high-interest debt, and major purchases. However, because your home is the collateral for these loans, missing payments puts your home at risk.

Before taking out a home equity loan, make sure you understand how such a loan works and what alternatives you have. In this article, we’ll define what a home equity loan is, how long it usually takes to get approved, as well as the risks involved.

What is a home equity loan?

The equity in your home is the difference between what you owe on the mortgage and how much your home is worth. When you borrow against that equity, it’s called a home equity loan, also known as a second mortgage. Usually, you can apply for these types of loans at banks, credit unions, and online lenders.

A home equity loan is a popular financing option because it allows homeowners to access cash without having to sell their property. A homeowner can use this money for any purpose they like, such as paying off high-interest debt, college tuition, expensive medical bills, or making major repairs to their house. Though the interest rates on home equity loans are often higher than that of a first mortgage, they are still considerably lower than that of other loan types.

Eligibility requirements

The same financial qualifications that qualify you for a mortgage also typically qualify you for a home equity loan. However, there are some additional factors that can affect your eligibility, such as having positive equity in your home.

In order to qualify for a home equity loan, you typically need to have a:

  • A debt-to-income ratio of 43% or less
  • A minimum credit score of 620
  • Home equity of at least 15% to 20%

To confirm your home’s fair market value, your lender might also ask for an appraisal to accurately determine the equity in your home and how much you’re able to borrow.

Pro Tip

Never use your home equity loan to pay for expenses such as clothing, groceries, utilities, or even luxury goods. If the value of your property can’t keep up with your level of spending, you could potentially go upside-down on your mortgage.

How long does it take to get a home equity loan or a HELOC?

If you want to apply for a home equity loan, it’s important to know how long the process will take. There are many different factors that go into determining the length of time it takes to get your home equity loan approved. This includes your personal credit score, debt-to-income ratio, property debt, etc.

A good rule of thumb is between two to four weeks from start to finish. However, your lender may ask for additional documentation if you have a poor credit score, low income, or a high loan-to-value ratio, which can delay the entire process.

Home equity loan pros and cons

Before taking out a home equity loan, it’s important to consider its pros and cons and evaluate whether it makes financial sense for you.

WEIGH THE RISKS AND BENEFITS

Here is a list of the benefits and the drawbacks to consider.

Pros
  • Fixed interest. The interest rate on a home equity loan is fixed, meaning it will not change over the life of the loan. This makes it a good choice for borrowers who are looking for a stable monthly payment and want to avoid the possibility of interest rates increasing later on.
  • Potential tax deductions on interest payments. According to the IRS, you’re able to deduct interest on a home equity loan if it’s used to buy, build, or substantially improve your home.
  • Lower interest rate. The interest rate on a home equity loan is typically lower than on other types of loans, such as credit cards or personal loans. This makes it a good option for financing large expenses.
Cons
  • You could lose your home. If you fail to make your payments and default on them, then the lender has the right to foreclose on your property to recoup what you owe them. So, if you’re considering a home equity loan, make sure you can repay the loan on time. Otherwise, you could end up losing your most valuable asset.
  • Closing costs. Home equity loan closing costs can range between 2% to 5% of the total loan amount. If you’re borrowing $200,000, then the closing cost can be anywhere from $4,000 to $10,000. However, some lenders may offer low or even no closing costs. So it’s important to choose your lender wisely.
  • Equity can rise and fall. If you’ve decided to take out a significant amount of equity in your home and the real estate market falls, you could lose all the equity in your home and even end up with negative equity.

Home equity loan vs. Home equity line of credit (HELOC)

A home equity loan and a home equity line of credit are both types of loans that use the equity in your home as collateral. The main difference between the two is that a home equity loan is a lump sum that you receive all at once, while a home equity line of credit is a revolving line of credit that you can borrow against as needed.

Another key difference between them is that home equity loans typically have a fixed interest rate. That means your monthly payments will stay the same no matter what happens with the market or the economy in general, which can give you some peace of mind. HELOC, on the other hand, has a variable interest rate. This can be a good or bad thing, depending on how the market performs. If interest rates are high when you take out your loan, then your monthly payments will be more expensive, and vice versa.

Pro Tip

If you have multiple high-interest bills, it may be a smart financial decision to take advantage of a home equity loan’s low-interest rate to pay off those debts. But make sure to consult with a loan specialist beforehand to make sure it’s the right move for you.

FAQs

How do you calculate your home equity?

Simply put, your home equity is the difference between the market value of your home and the amount you still owe on your mortgage. To calculate how much equity your home has, simply subtract your mortgage balance from your home’s current market value.

For example, if your home is worth $500,000 and you still owe $200,000 on your mortgage, then your home equity would be $300,000. And to calculate your home equity percentage, divide your home equity by your home’s market value. In this case, it would be $300,000 divided by $500,000 which equals a 60% equity in the home.

How much home equity loan can you get?

The amount of home equity loan you can get depends on multiple factors including your income, credit score, and the lender you choose. Typically, lenders will allow you to borrow a maximum of 80% to 90% of the appraised value of your home.

For example, your home was appraised for $600,000 and you still have a mortgage loan balance of $250,000. Then that means you have $350,000 in home equity—assuming there are no other obligations associated with the house. As a result, the limit of your home equity loan should be around $280,000 to $315,000.

Should you take out a home equity loan or a HELOC?

With a home equity loan, you borrow a lump sum of money and make fixed monthly payments. This type of loan is best if you need a large amount of money all at once, such as for a major purchase or investment where you know exactly how much you need. With a home equity line of credit, you have a revolving line of credit that you can draw from as needed. This is great if you need flexibility in how you use the money, such as for ongoing home repairs or improvements.

So, which one is right for you? It depends on your financing needs. If you need a large amount of money all at once, a home equity loan is probably your best bet. But if you need some extra cash on hand for ongoing expenses, a home equity line of credit could be a better choice. Talk to your lender to see what option makes the most sense for you.

Key Takeaways

  • It generally takes around two to four weeks to get a home equity loan. However, other factors such as your personal credit score, debt-to-income ratio, and property debt can affect the application process.
  • A home equity loan is a type of secured loan that allows homeowners to borrow against the value of their home. This type of loan can be used for a variety of purposes, such as home repairs, consolidating debt, or financing a college education.
  • The advantages of taking out a home equity loan include fixed interest payments, potential tax deductions, as well as a paying a lower interest rate compared to other loan options.
  • The disadvantages of a home equity loan include potentially losing your home if you default on the loan, expensive closing costs, as well as the risk of being subject to real estate market fluctuations.
  • Typically, lenders will allow borrowers to take out a home equity loan of between 80% to 90% of the appraised value of their homes. However, this also depends on other factors such as their income level and credit scores.
  • The amount of equity you have in your home is calculated by subtracting your mortgage balance from your home’s current market value.
  • A home equity line of credit (HELOC) is a type of revolving credit that allows you to borrow money up to a certain limit and pay it back over time.

Compare lenders and get best deal

A home equity loan can be a good option for homeowners who need to borrow a large amount of money. However, it is important to remember that if you default on the loan, you could lose your home. Therefore, make sure you can afford the monthly payments before taking out a home equity loan.

At the end of the day, whether you’re thinking about taking out a home equity loan or home equity line of credit, it’s important to compare offers from different lenders to ensure you’re getting the best deal. So try to get a quote from at least three different lenders, then use those quotes to negotiate for the best rates. If you aren’t able to find a good deal, it may be also worth considering some home equity loans and HELOC alternatives, such as a cash-out refinance.

View Article Sources
  1. Topic No. 505 Interest Expense — IRS
  2. Home Equity Loans and Home Equity Lines of Credit — Federal Trade Commission
  3. Best Shared Equity Agreements | March 2022 — SuperMoney
  4. Reverse Mortgage vs. Home Equity Loan vs. HELOC: Pros & Cons — SuperMoney
  5. Is It Wise To Use A Home Equity Loan For Debt Consolidation? — SuperMoney
  6. What Is a Second Mortgage? (And How To Get One) — SuperMoney
  7. Home Improvement Financing: How to Finance Home Renovation (Updated 2022) — SuperMoney
  8. Home Equity Lines of Credit: Reviews & Comparisons — SuperMoney