Sometimes you need money. Maybe an emergency has come up. Or, lo and behold, you didn’t save enough to pay for that trip you want to take. The million-dollar question becomes: How will you get the extra funds?
If you’re a homeowner, one option is to tap into the equity in your home by taking out a home equity line of credit (HELOC) or a home equity loan. Sound interesting?
Let’s look at how long it takes to get a HELOC or a home equity loan and what the process involves.
Is a HELOC or Home Equity Loan a Good Idea?
To help decide whether a HELOC or home equity loan is the way to go, you’ll want to know how each one works.
What is a HELOC?
A HELOC is a type of loan. It’s a revolving line of credit that uses the equity in the borrower’s home as collateral.
Having a HELOC is a lot like having a credit card. You can access money up to a maximum credit limit. You borrow what you need and pay interest only on what you borrow. A HELOC comes with two distinct phases:
- A draw period: This is typically a 10-year period when you can access (aka “draw” from) your available credit. The loan is repaid after the draw period – usually over 20 years.
- A repayment period: The repayment period follows the draw period. This is when the balance of your HELOC is paid back. Usually, the loan is repaid with monthly payments. Each payment includes a portion of both the principal and the interest.
Alert: HELOCs tend to have variable interest rates. Based on market interest rates and the terms of your loan agreement, the amount of interest in your monthly bill can go up or down periodically.
Some HELOCs come with a balloon payment, which is a large one-time payment you make at the end of the loan.
What is a home equity loan?
A home equity loan is a second mortgage. Like a HELOC, a home equity loan borrows from the equity you’ve built up in your home or primary residence. Instead of a line of credit, you get a lump sum of money and pay interest on the entire amount.
Most home equity loans have fixed interest rates and monthly payments that are amortized. That means you’ll pay the same amount each month over the life of the loan.
Is a HELOC or home equity loan right for me?
Typically, HELOCs are great for home renovation projects – like constructing new rooms – that will take a long time to complete. Because you only borrow money as you need it, you don’t pay interest on the entire sum of the loan.
You can also use a HELOC for debt consolidation. Let’s say you’ve got a few types of existing debt, like a higher-interest personal loan and balances on a few credit cards. Taking out a HELOC with a lower interest rate can help you pay this debt down – or even pay it off entirely.
Yes, you’ll have to pay back the HELOC, but it will be at a lower interest rate. You’ll also have longer – up to 20 years in many cases – to pay off the loan.
A lump-sum loan, like a home equity loan, tends to be a good choice for a one-time expense or event, like a wedding, an unexpected medical bill or a larger-than-average purchase.
Keep in mind that because of the 2017 Tax Cuts and Jobs Act, interest paid on HELOCs and home equity loans are only tax-deductible if they’re used for home improvements.
Okay, But How Long Will the HELOC Process Take?
Each lender is different, so the timeline will vary. In general, you can expect approval for a HELOC or home equity loan to take 2 – 6 weeks from applying to closing.
The length of time depends on numerous factors, including the complexity of the loan, whether you’ll need a home appraisal and whether you meet the lender’s borrowing criteria.
The truth is … it could take a while. You could have the process wrapped up in 2 weeks but plan on it taking at least 30 days.
The HELOC and Home Equity Loan Process
Let’s look at the steps you’ll have to take to get a HELOC or home equity loan.
Checking your qualifications
What you’ll need to qualify for a HELOC or home equity loan may differ from lender to lender. In most cases, you’ll want to have:
- At least 20% equity in your home
- A history of stable employment
- A maximum DTI of 43%
- A credit score of 700 or higher (A lower score might be acceptable, but you’ll likely pay a higher interest rate.)
If you meet these preliminary criteria, meet with a lender and fill out a loan application. Pro tip: You can skip meeting the lender and fill out the application online.
Going over the loan’s terms and requirements
Once you’ve completed the application and the lender determines that you’ve met the initial qualifications, you may be asked to provide extra paperwork or answer more questions.
At this point, you’ll review the loan’s terms and requirements with the lender, including the interest rate, the total loan amount, your draw period and payment schedule.
Appraising your home
Because you use your home as collateral with a HELOC or home equity loan, the lender needs to know what your home is worth. To figure that out, your home will be appraised by a professional appraiser who will look over the home to determine its value and consider the sale price of comparable homes (aka comps) in the area.
Confirming how much equity you have
To determine the amount of money available for your HELOC or home equity loan, your lender needs to know how much equity you have in the home.
To calculate your loan-to-value (LTV) ratio, lenders will measure what you owe on your mortgage compared to your home’s current value. A good LTV caps out at 80%, which would mean there is 20% equity in the home.
The combined loan-to-value (CLTV) ratio is important as well. The “combined” part of this number is the total amount of all loans against the property, including the existing mortgage(s) and the loan you want. The total is then divided by the current value of your home.
The formula for your CLTV looks like this:
CLTV = (remaining balances on existing home loans + the amount of the new loan you want) / the current value of your home
The CLTV indicates to the lender whether you can afford the new loan or need to borrow less. Lenders like to see a maximum CLTV of 80% – 85%. This means that you’ve paid over 15% of your home’s equity. (FYI: It takes longer to achieve this goal if you bought your home with a low down payment.)
A mortgage underwriter meticulously analyzes your finances to determine whether you can afford the loan and repay it without going into default (think: unable to pay back the loan).
Your credit history, income, assets and your home’s market value are assessed to help the underwriter decide whether to approve or deny the loan.
This is when you celebrate! You’ll sign the necessary paperwork and finalize the loan.
Remember to plan for closing costs. The costs – which can include an application fee, appraisal fee and credit report fee – can range from 2% – 5% of the total amount you’re borrowing.
Is a Fast HELOC or Home Equity Loan Possible?
A faster HELOC or home equity loan is possible. How long it takes will depend on a few factors.
It will depend on the time it takes to check your qualifications. If your lender requests more paperwork or answers from you, that could add hours, days or weeks to your timeline. Add in a home appraisal and the underwriter’s loan verification process, and you could be looking at a lengthy endeavor.
To save time, gather as much documentation as you can before you fill out the application. Sometimes you’ll find a required list of documents on a lender’s website, or you can ask the lender what they’ll need from you.
Generally, you’ll need:
- Pay stubs
- Your Social Security number
- Mortgage and payment paperwork
- Homeowners insurance policy
- Tax returns
A lot of this info will give lenders a decent idea of whether you’ll qualify for the loan before the process begins in earnest.
But I Need the Money Faster
Is 2 – 6 weeks too long? Well, you might want to consider a personal loan. While it may be faster, the downside is the potential of getting a higher interest rate.
Using a credit card with a low introductory interest rate is another option – but it can be a risky one. The introductory rate is compelling, but it can dramatically shoot up at the end of the introductory period.
Discuss your needs with a professional at a bank or credit union or with an online lender. You’ll need sound advice to help you figure out which loan is right for you, putting you in a better position to comfortably put your money to work for you and your goals.
Experian™. “What Is a Draw Period On a HELOC?” Retrieved November 2021 from https://www.experian.com/blogs/ask-experian/what-is-a-draw-period-on-a-heloc/
Internal Revenue Service. “Tax reform affects if and how taxpayers itemize their deductions.” Retrieved November 2021 from https://www.irs.gov/newsroom/tax-reform-affects-if-and-how-taxpayers-itemize-their-deductions
Experian™. “What Credit Score Do I Need To Get a Home Equity Loan?” Retrieved November 2021 from https://www.experian.com/blogs/ask-experian/what-credit-score-do-i-need-to-get-a-home-equity-loan/
Federal Deposit Insurance Corporation. “FDIC Law, Regulations, Related Acts.” Retrieved November 2021 from https://www.fdic.gov/regulations/laws/rules/