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what is a home equity loan

Home Equity Loan & Home Equity Line Of Credit

 A home equity loan is basically a second mortgage, in which you take out the total amount you intend to borrow in one lump sum and pay it back every month. The time period is typically 5-15 years. A home equity line of credit, or HELOC, gives you the ability to borrow up to a certain amount over a 10-year period.

 There are two ways you can borrow against your property: A home equity loan lets you borrow a lump sum and pay it back over a fixed term at a fixed interest rate (like a mortgage or car loan). A HELOC works more like a credit card 

However, a home equity loan gives borrowers a fixed amount of money in one lump sum instead of a revolving line of credit. You pay back the loan over an agreed term. ... Interest rates for home equity loans tend to be higher than HELOCs because lenders give you the security of a fixed rate.

 Interest rates are usually higher for home equity loans than they are for HELOCs because you're trading a lower interest rate in exchange for stability in the rate you'll pay over time.  

 Home equity loans are paid back via fixed monthly payments at a fixed interest rate. HELOCs allow you to make interest-only payments during the draw period, then you make principal and interest payments after

Few, if any, lenders these days will allow you to borrow against the full amount of your home equity, although that was common during the pre-crash days. As a rule of thumb, lenders will generally allow you to borrow up to 75-90 percent of your available equity, depending on the lender and your credit and income.  You can borrow for as little as five years or opt for home equity loans of 10 or even 15 years. Just as some homeowners take a 30-year mortgage and pay it off early, you can get a five-, 10- or 15-year home equity loan and make extra payments to retire the obligation sooner, unless your loan has a prepayment penalty. 

 A homeowner can sell a home that has an existing home equity loan. This is easiest if the sale price on the home is high enough to pay off the equity loan. Because the house can no longer serve as collateral, the home equity loan must be paid off in some way in order for the home to be sold. 


home equity loan vs Heloc

Common Questions

 Is it hard to get a home equity loan?

If your credit score is lower than 620, it may be difficult to qualify for a home equity loan. ... Home equity loans are long-term loans that take years to repay so don't borrow more than you need, only using it for major financial reasons

 Is it better to take out a home equity loan or a personal loan?

Flexibility  with a home equity loan, terms can be much more flexible than with a personal loan. ... Personal loans don't typically go higher than $100,000, but some home equity loans go much larger than that, as long as you have enough equity in your home. Lower interest rates

Do you need an appraisal for a home equity line of credit?

Generally, all that's required to apply is an appraisal of your home and verification of your income. This also means that approval comes more quickly. Usually, you can get a home equity loan or HELOC in a matter of weeks– it's much quicker than the months-long ordeal of securing a mortgage

 Closing costs on a home equity line of credit are much less than they are for a comparable home equity loan. Rather than basing the closing costs on the amount of the line of credit, lenders typically charge a flat fee origination. ... Fees, penalties, and interest rates can vary based on your credit score and the lender. 

Learn More

 Organize Your Home Equity Loan Paperwork

  • W2 earnings statements or 1099 DIV income statements for the last two years.
  • Federal tax returns for the last two years.
  • Bank statements for the last few months.
  • Recent paycheck stubs.
  • Proof of other income, such as tips, Social Security payments, etc.
  • Proof of investment income.


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 Getting a home equity loan with bad credit requires a debt-to-income ratio in the lower 40s or less, a credit score of 620 or higher and home value of 10-20% more than you owe.  


 Due to credit scoring, your credit has to be pretty bad for you to be denied a home equity loan, mortgage or car loan entirely. Plus, more credit card issuers allow people to rebuild their credit with secured credit cards. Meanwhile, even if one lender refuses to approve someone, that doesn't mean all will. 


 You can borrow against available funds whenever you need money, repay it with interest and borrow again as long as you don't exceed your credit limit. But while certain credit cards and personal loans are unsecured credit, a HELOC is secured by the equity in your home. 


 While having bad credit can crush your chances of getting approved for new loans, owning a home that’s worth more than your loan balance can save you because it gives you the option of taking out a home equity loan. 


 The maximum amount you can borrow is based on your loan-to-value ratio, or LTV. The LTV ratio is calculated as a percentage by dividing your remaining loan balance by the home’s current value .


 Not all lenders have the same standards for home equity loans. Because of this, you should shop around for rates and terms from many different lenders 

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