Home Equity Loan Basics
What is a home equity loan?
If you are a homeowner looking for a way to access cash, tapping into the equity of your home may be a good way to achieve that goal. The equity in your home is the difference between what is owed on your mortgage and the home’s current value. Also called a second mortgage, a home equity loan allows you to borrow money based on your home’s available equity.
Unlike refinancing, a home equity loan does not impact your current mortgage, making it an excellent option to obtain funds for large or unexpected expenses. Continue reading or speak with our Loan Officers to see how you can put your biggest investment to work for you!
Qualification Requirements
How do I qualify for a home equity loan?
Qualifying for a home equity loan is likely easier than you think! Some basic home equity loan qualifications include:
- Good credit: A qualifying credit score, typically over 620, is required in most instances.
- Manageable debt: A debt-to-income ratio (DTI) less than 43% is typically required.
- Sufficient equity: A general rule of thumb is that you should have at least 15-20% equity in your home, but this varies from state-to-state. Check with your loan officer to see what options may be available for your home.
- Steady employment and income: Stable income and employment history, including supporting documentation like tax returns, bank statements, and pay stubs.
What are the advantages of a home equity loan?
- Fixed interest rates: Predictable monthly payments provide you with security, allowing you to continue financially planning and budgeting with ease.
- Lower interest rates: Since your home secures the loan, lenders typically offer significantly lower rates compared to credit cards or unsecured personal loans which can help you save money over time! Our Home Equity Calculator helps you estimate how different rates may impact your payment.
- No restrictions on usage: The money can generally be used however you see fit. Some common uses are home improvements, debt consolidation, or other large expenses (college tuition, vehicle purchases, paying for a wedding, medical bills, etc.). Different products have difference restrictions. Check with your loan officer to see what options may be available to you.
Whether you are looking to renovate your kitchen or purchase a new car, a home equity loan is may be one of your best options. At RoundPoint, we can’t wait to help you achieve your financial goals or tackle unexpected expenses by tapping into your home’s equity!
Fees & Costs
What fees and costs are associated with home equity loans?
Similar to a first mortgage, there are fees and costs involved with home equity loans. Some of these charges can significantly impact your monthly payment amount and the total cost of the loan, so it is important to understand what you are paying for and why.
Let’s look at some common fees and costs associated with a home equity loan:
Origination Fee
Fee charged by the lender for processing your loan
$0 – $995
Appraisal Fee
Cost of hiring a professional appraiser to determine your home’s value
$0 – $2,000
Credit Report Fee
Fee paid to pull and review your credit report.
Typically under $50
Recording/Settlement Fees
Fee paid to your local government to officially register your mortgage documents
$0 – $1,000
How can I lower my home equity loan costs and fees?
While many costs are considered standard, some are negotiable or can be avoided completely. Here are a few strategies that may reduce or eliminate your costs:
- Compare lenders: Fees are not the same for all mortgage lenders. Compare loan estimates from multiple lenders to determine the most competitive option.
- Credit score: Improving your credit score may qualify you for lower interest rates or overall fees.
- Ask about waivers and discounts: Based on your credit score or loan type, you may be eligible for fee reductions or waivers. It never hurts to ask!
At RoundPoint, we believe in transparency and affordability. Let us help you feel empowered and prepared when making financial decisions during your homeownership journey!
Home Equity Options At a Glance
Using Your Home Equity: Comparing Your Options
| Refinance | Home Equity Loan | Home Equity Line of Credit (HELOC) | |
| What is it? | A new mortgage loan that replaces your existing mortgage loan | A fixed-term loan | A revolving line of credit |
| Funds | Lump-sum check or reduced monthly payment due to change in term and/or rate | Lump-sum check | Withdraw funds as needed |
| Interest Rates | Fixed or adjustable | Fixed | Adjustable |
| Upfront Costs | Closing costs similar to initial mortgage purchase | Typically lower closing costs than cash-out refinance | Often the lowest closing costs, sometimes none at all |
| Number of Payments | One consolidated monthly mortgage payment | Two payments: one for your primary mortgage and one for the home equity loan | Two payments: one for your primary mortgage and one for the HELOC |
| Ideal For | Homeowners interested in accessing a large lump-sum amount, lowering your rate, and/or changing your term | Homeowners looking to fund a large expense but wanting to keep their original mortgage rate and terms | Homeowners needing to pay for ongoing or unexpected expenses that are also comfortable with varying rates and payment amounts |
