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For Americans, homeownership can serve wealth building, saving, and financing. At the time owners are paying off their mortgage, house value usually goes up. Simultaneously, they may think of house renovation, continuing their education, purchasing a new car, or even getting a larger home. Therefore, homeowners can turn the home equity into collateral to benefit from.
“What is a home equity loan, how long does a home equity loan take, and what are the procedures for getting a home equity loan” are all answered in this article. The article also presents existing differences between a home equity loan and a home equity line of credit. Knowing all that helps homeowners access their home equity intelligently.
What is a Home Equity Loan?
Home equity is the paid share of the homeowner from the home. It is the difference between home market value and the amount the homeowner still owes on the mortgage and any other home loans. For example, the owner’s home equity is $350,000 because the house was evaluated at $450,000 while $150,000 was down paid and $200,000 out of the $350,000 of the mortgage had already been paid.
Home Equity = Home market value – (amount due on mortgage + other house loans to be paid)
Borrowers should be aware that the home equity loan amount is counted as a proportion of the actual home value. This percentage can change from a state into another as per state legislation.
Why Home Equity Loans are Important?
Home equity loans are important because they are cost-effective. In other words, they come with lower rates than other loaning options such as personal loans online. As a result, they can be of primary use for covering major expenses. Therefore, borrowers can make smart decisions and take advantage of owning a house and paying its mortgage on time.
How Long Does It Take to Get a Home Equity Loan?
“How long does a home equity loan take?” is a concern that matters for many who need an instant loan. The response is not static as it depends on a variety of factors. Lenders usually specify a period from four to six weeks for securing the loan. The loan amount, the documentation, and the home pricing are all factors that impact the processing time. To be on the safe side, borrowers should understand that home equity loan process time may take anywhere from a month up to two months. From a legal aspect, the loan query concludes in not less than 12 days upon application submission and the receipt of official notice of rights.
Who is Eligible for Home Equity Loan?
Typically, applicants of home equity loans should:
- have paid at least 20% of their mortgage. Any interest paid for the house mortgage does not contribute to home equity
- the maximum mortgage to home value ratio is 80%
- have a good credit score (between 670 – 739)
- have a low debt to income ratio (below 50%, with some lenders below 43%)
- proof of employment and steady income.
What are the Home Equity Loan Process Steps?
- Borrowers need to determine the amount of loan they need and the monthly payment they can afford. Alternatively, the loan may not serve the purpose and might put them in a situation of uncontrollable debts.
- Then homeowners prepare the necessary documents to inquire about the home equity loan. These documents should include a US identity card or driving license, information on employment status, bank statement, paystubs, latest mortgage records, information on paid taxes and income, and property ownership documents.
- Next, they look for potential lenders and make comparisons between the offers they receive. There may be differences in the interest rates, service rates, speed, and most importantly, the maximum loan amount.
- Then they submit the documents together with their application. Lenders usually guide borrowers on how to obtain any missing documents.
- Once the documents are complete, homeowners will require an official house evaluation by a certified appraiser. The process and its requirements range from one lender to another.
- Later, when the home market price is defined, the underwriter studies the submitted documents, borrower’s financial stability, and credit history. The underwriter compares the gathered information with the house price evaluation outcome. The comparison helps to define the creditworthiness of the homeowner. As mentioned earlier, the home equity loan amount is counted as a proportion of the actual home value.
- During the closing stage, borrowers usually require meeting the lenders in person at their office, signing the loan agreement, and arranging for the collection of funds.
Important to Know
- In many cases, “How long does underwriting take” is a question that many borrowers ask. It is important for them to know that inadequate documentation, errors in the application form, and creditworthiness issues impact the closing stage negatively. Accordingly, it has an influence on the underwriting process. Therefore, they must review home equity loan requirements and check their eligibility before filing an application. Alternatively, they may apply for a personal loan online.
- There is a grace period of three days to cancel the signed home equity loan agreement. Usually, on the fourth day of signing the agreement, borrowers receive the loan amount in their account and define their way of disbursing it.
What is the Home Equity Line of Credit (HELOC)?
HELOC is like a home equity loan. It is based on the accumulated equity and uses it as collateral. Like home equity loans, lenders usually set a minimum and maximum draw amount for HELOC and almost the same eligibility criteria. The approval for getting a HELOC and HELOC processing time is the same as a home equity line of credit. In other words, if someone asks how long it takes to get a home equity line of credit, the answer is the same: anywhere between four to six weeks for securing the loan. However, HELOC differs in terms of cash access, amount approval, repayment, interest rates, and costs. In this respect, existing differences might help determine which home equity loan type is appropriate for a given case.
Home Equity Loans and HELOCs: Quick Comparison
Accessing the Cash
While a home equity loan pays in one lump sum, HELOC pays as one needs up to a certain amount. This allows further flexibility when it is unclear how much the borrower needs. For example, borrowers may have the approval for HELOC but utilize the funds in emergency cases when they are in severe need. Therefore, a home equity loan should be borrowers’ choice for a one-time expense, while HELOC for recurring expenses.
Approved Draw Amount
Both loan types have a minimum and maximum draw amount set by lenders. In the case of the home equity loan, lenders set the amount and approve it immediately away. In the case of HELOC, lenders impose a minimum credit limit for a set period. The credit limit must be met not at the start of the process, but before the loan period is closed.
Borrowers repay the home equity loan after having the funds fully. On the contrary, borrowers use the HELOC while repaying it.
Generally, home equity loan agreements are set for a period from 5 to 15 years. Some lenders extend that period to even 30 years, based on the applicants’ payment abilities and credit history. The period of utilizing the HELOC is usually set for a maximum of 10 years. Repaying the HELOC can start from day one of acquiring the loan and end in a period of 25 years. This period depends on the loan amount and the lender’s ability to extend the loan. One needs to remember that the HELOC draw period is not open. It is usually set for a period of 10 years after which the borrowers cannot acquire further credit. Instead, they repay the credited amount in a period from 10 to 25 years.
If compared with other types of loans, both loan types are considered low-rate loans. The interest rate and schedule are fixed on a home equity loan. Borrowers pay the interest whether they use the amount partially or fully. On a HELOC, borrowers pay the interest rate ONLY when they withdraw the funds and according to the amount. However, the interest rate increases based on the amount. The rate also increases with the time it takes for the borrower to repay the credited amount and market fluctuation.
Loan Application Costs
There are costs relevant to both loan types. In the case of a home equity loan, the cost is clear and mentioned in the agreement. In this respect, borrowers are aware of the closing costs, prepayment penalties, if any, before signing the contract. HELOC costs vary. Some lenders charge both closing costs and prepayment penalties while others don’t. Instead, borrowers must keep the credit line open for at least two years. Alternatively, penalties may apply. Apart from these mentioned HELOC costs, annual membership and account maintenance costs can be also charged by lenders. Borrowers need to consider these costs so that they never get surprised during the HELOC application process.
In conclusion, whether it is a one-time home equity loan or HELOC, it is best to consider the loan seriously and study available options. It is the second debt in addition to the original home mortgage they are responsible for. They are using their own property as collateral. They can lose the latter if they cannot afford to repay the two mortgages. Therefore, in many cases, they may prefer to apply for a loan through online loan network. Learning how long it takes to get a home equity loan is important but having a repayment strategy is even more important. It is in this way only that individuals make the best use of their home mortgage.