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Home equity loans, also referred to as “second mortgages” are just one of the few ways you can use the equity in your home to receive extra cash that can be used for virtually anything. This type of loan, however, is most often used to pay for large expenses, like home remodeling or debt consolidation.
The amount of the loan depends on your home’s market value, or equity, and how much you’ve paid so far on your mortgage. For example, if your home is valued at $300,000 and you still owe $200,000, the amount of equity you have would be the difference—$100,000. The market value would be decided by an appraiser.
Just as with a regular mortgage, you can get a home equity loan from an online lender or from a bank or credit union. A home equity loan is generally easier to qualify for than other loan types you’re using your home as collateral.
While home equity loans can be a great way to convert your home into cash, it’s important to weigh the pros and cons before making a decision.
As mentioned earlier, to understand how much equity you have in your home, you’ll need to know how much you still owe on your mortgage and how much your home is currently valued at. When applying for a home equity loan, most lenders will require that you have a minimum of 15%-20% equity.
To determine your home’s value, you’ll need to have your home appraised. This involves hiring a licensed appraiser to conduct a full home inspection. They’ll consider various factors like the condition of your property, upgrades or additions you’ve made, the size of the property, and more to get the appraisal value.
The cost for a home appraisal is anywhere from $200-$600, depending on the size of your home, location, and the home’s condition, among other factors.
While you can take out a home equity loan through traditional lending institutions, like banks and credit unions, expanding your search to also include online-only lenders will help you find the best rates.
While most lenders have a similar set of requirements, like verifiable employment and income, access to tax records, and sufficient equity in your home, other factors will vary from lender to lender, like interest rates, fees, and credit score minimum. Shop around and compare lenders to find the best rates.
Let’s take a look at a few of our partner lenders currently offering home equity loans at competitive rates.
Quicken Loans is possibly the biggest contender in the home loans sector, certainly the biggest Federal Housing Administration-backed one. The company launched an online loan process, known as Rocket Mortgage, for a faster and more streamlined process than the traditional in-person method for mortgage loan applications.
Amerisave is a direct mortgage lender offering several types of loans, including conventional, jumbo, VA, FHA, USDA, fixed, adjustable, across both purchase and refinance. Licensed in 49 states, AmeriSave has been around since 2002 and has funded nearly $60 billion in mortgage loans.
Better Mortgage Corporation is a direct mortgage lender based in New York. You can refinance your existing mortgage or get a loan for the purchase of a home through Better Mortgage. Their mission is to use technology to replace the old mortgage process, which means less paperwork and fewer barriers to getting a home loan for borrowers.
Aside from a home equity loan, there are two other ways to turn your home equity into cash—a home equity line of credit (HELOC) and cash-out refinancing. One key similarity between all three of these options is that you’re using your home as collateral.
Similar to a credit card, a HELOC is a revolving line of credit that you can use as needed to borrow against the equity of your home (up to a certain amount). Unlike a home equity loan, HELOCs typically have variable interest rates and the payments aren’t fixed.
This is another way to borrow against your home’s available equity. The big difference between a cash-out refinance and a home equity loan or HELOC is that this option involves paying off your existing mortgage, resulting in a new mortgage with different terms, like a different interest rate or monthly payment.