A home equity loan lets you borrow against your home’s equity. Best of all, you keep your current first mortgage. You get a lump sum, and the rate and payment are usually fixed.
For example, many homeowners use one to remodel or to pay off high-interest debt. It also helps if you have a low mortgage rate you don’t want to lose. At Honest Rate, we compare options from multiple lenders. As a result, you can find a loan that fits your goals.
A home equity loan is a loan backed by your home. In most cases, it sits behind your first mortgage as a second lien. For this reason, people often call it a second mortgage. You borrow a set amount and repay it over a set term. Meanwhile, your first mortgage stays the same.
Your limit depends on your home’s value, your mortgage balance, and the lender’s maximum combined loan-to-value ratio (CLTV). CLTV compares all your mortgage debt to your home’s value.
For example, say your home is worth $500,000 and you owe $250,000. If you borrow $100,000 more, your total debt is $350,000. That equals a 70% CLTV.
However, CLTV limits vary by lender. In addition, your credit, income, and property type can change how much you can borrow.
Because a home equity loan leaves your first mortgage alone, you can keep a low rate. Also, you only borrow what you need. That said, a cash-out refinance may work better in some cases. So it pays to compare all three.
Most people use the money in one of these ways:
First, lenders look at your home value and mortgage balance. Next, they review your credit, income, debts, and property type. You don’t need to own your home outright. In fact, most home equity loans sit behind an existing first mortgage.
There is no single minimum credit score. Instead, each lender sets its own rules. A lower score may limit your options. Still, it doesn’t mean you’ll be turned down.
Can I get a home equity loan without refinancing? Yes. Your first mortgage stays in place, and the new loan is added as a separate lien.
Is a home equity loan a second mortgage? Usually, yes. If you already have a first mortgage, the new loan is recorded behind it. However, it doesn’t replace your first mortgage.
Is a home equity loan fixed or variable? Most have a fixed rate and a fixed payment. By comparison, HELOCs often have variable rates.
Do I need an appraisal? Not always. Some lenders use an automated valuation instead. Others, however, may require a full appraisal.
How fast can I get a home equity loan? It depends on the lender and your situation. For instance, income documents, title work, and existing liens can all affect timing. Even so, some programs close faster than a refinance.
Can I use one to pay off credit cards? Yes, in many cases. Just remember that your home secures the new loan.
Does a home equity loan change my first mortgage? No. Your first mortgage keeps its rate and terms.
Is the interest tax deductible? Possibly. It depends on how you use the funds and current tax law. Therefore, ask a tax professional about your situation.
Should I choose a HELOC or a home equity loan? If you need a set amount and want a steady payment, choose a home equity loan. On the other hand, if you want ongoing access to funds, a HELOC may fit better.
You’ve built equity in your home. Now it’s smart to understand every way to use it. Because we work with multiple lenders, we can compare home equity loans, HELOCs, and cash-out refinancing side by side. Most importantly, we’ll help you decide how much you should borrow, not just how much you can.
