Which Home Equity Loan Term Should You Choose
The best home equity loan term for you more than likely depends on the monthly payment amount you can comfortably afford. After all, your lender will consider your debt-to-income ratio, or the percentage of your gross monthly income used to repay debt, when qualifying you for a loan. In most cases, your DTI ratio shouldnt exceed 43%.
Lets compare the home equity interest rates and monthly payments on a $25,000 balance with five-, 10- and 15-year home equity loan terms.
| 5-year home equity loan |
| $12,610.23 |
*Rates are current as of this writing.
If a nearly $500 monthly payment on a five-year home equity loan for $25,000 would stretch your budget too thin, you might consider a 10- or 15-year term. For an even larger loan balance, it may make sense to opt for a longer repayment term to maintain a comfortable cash flow.
Drawback #: Money Doesn’t Come Cheap
A home equity loan is a second mortgage on your house. Interest rates are usually much lower for a home equity loan than for unsecured debt like personal loans and credit cards. But transaction and closing costs, similar to those for primary mortgages, make home equity loans a pricey and imprudent way to finance something you may want but don’t absolutely need, like a fur coat, exotic vacation, or Ferrari.
The average closing costs on a $200,000 mortgage are $4,070. To compare offers on competing home equity loans, use a calculator that compares fees, interest rates, and how long youll take to pay back the loan. Ask your current mortgage lender if it offers any discounts if you get a second mortgage from the same company.
Rates Terms And Repayment Options
The beauty of home equity products is the flexibility thats available to you as a borrower. Because these products offer multiple terms and repayment options, you can choose options based on your individual needs.
To help you understand how rates, terms and repayment options work, lets discuss each aspect as they relate to the different types of home equity products that are available to you.
First, lets discuss popular loan terms and what they mean:
Rates are the amount of interest charged as a percentage of your loan amount paid to the lender for the use of the borrowed funds. Interest rates can be variable, meaning they change over time, or they can be fixed, meaning they stay the same for the duration of your loan term. Some lenders refer to interest rates as your annual percentage rate, or APR. Your interest rate is the amount you pay to borrow the funds you want.
Loan terms vary depending on the type of loan you obtain, and they merely describe the amount of time you have to repay the loan. A home equity loan term can range anywhere from 5-30 years. HELOCs generally allow up to 10 years to withdraw funds, and up to 20 years to repay. A cash-out refinance term can be up to 30 years.
Equity can be calculated by subtracting all debts secured by your home from your homes appraised value. For instance, if your home is worth $275,000 and your current mortgage is $100,000, then you have $175,000 of equity.
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Defaulting On Home Equity Loans And Helocs
Lea Uradu, J.D. is graduate of the University of Maryland School of Law, a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, Tax Writer, and Founder of L.A.W. Tax Resolution Services. Lea has worked with hundreds of federal individual and expat tax clients.
Home equity loans and home equity lines of credit are affordable ways to tap the equity in your home to use for home improvements, pay for education, and pay off credit cards or other higher-interest types of debt. These debt instruments are secured by your property and typically have lower interest rates than non-secured loans.
Home Equity Line Of Credit Payoff Calculator
Use our home equity line of credit payoff calculator to find out how much you would owe on your home equity-based line each month, depending on different variables. This is a handy tool to help you achieve your financial goals.
For HELOCs, use the calculator to find out:
- How much interest youll pay over the life of your line of credit
- What your payments will be, and how much interest youll save, if you pay off your line of credit faster
- What different interest rates mean for your monthly payment
- How much you could save by locking in your rate with a home equity
You can input data including payoff goal, current interest rate, yearly rate changes and annual fees to get accurate totals.
HELOCs are variable rate loans, which means your interest rate will adjust periodically. If youre worried about rising rates, see how much a fixed rate home equity loan could save you by keeping the rate change field at 0%.
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Stay In Your Home 5 Years Or More
Youll build equity if your home increases in value. Of course, no home is guaranteed to see its value jump, but you will increase your odds if you stay in your residence for a greater number of years.
Plan on staying in your home for 5 years or more if you want to see its value jump enough to give you an equity boost.
Get Advice Before You Do It Preferably From An Independent Financial Adviser
Before applying for a lifetime mortgage or home reversion plan, you’ll first need to seek financial advice all equity release lenders will insist on this.
As equity release is a complex area, it’s best to consult an independent financial adviser, who’ll be able to look at your whole financial circumstances to check whether equity release is right for you, and if so, which product might best suit you.
They’ll also be able to compare equity release deals from across the market. This means you’ll get the best advice and products tailored to your circumstances. See our Financial advisers guide for full details on how to find and appoint an adviser.
If you think that remortgaging is a better option, it’s best to speak with a mortgage broker though do note that general mortgage brokers won’t be able to advise on equity release.
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How Does Home Equity Work
Heres an example of how equity can change over time.
Say you buy a house for $200,000. You might come up with a down payment of 10% of your homes purchase price which would be $20,000. Your lender will then provide you with a mortgage loan of $180,000.
If your home is worth that $200,000 sales price, you now have $20,000 of equity, or $200,000 minus $180,000.
Jump ahead 2 years. Youve been making your mortgage payments on time, and you might now owe $170,000 on your mortgage. Maybe your homes value has jumped too during this time to $210,000.
You now have $40,000 in equity, or $210,000 minus $170,000.
Your homes value could work against you, too. Say youve paid down your mortgage loan to that same $170,000, but your homes value has actually dipped to $195,000. Now you have $25,000 in equity, or $195,000 minus $170,000.
To determine your equity at any one time, youll need to know the value of your home.
Only a real estate appraiser can give an official valuation of what your home is worth in todays market. You can, though, estimate your homes value by looking at comparable home sales in your area or by checking with online real estate sales that provide their own home value estimates.
Just remember that these estimates arent always accurate and exist just to give you a rough idea of your homes current worth.
How To Get A Home Equity Loan
Apply with several lenders and compare their costs, including interest rates. You can get loan estimates from several different sources, including a local loan originator, an online or national broker, or your preferred bank or credit union.
Lenders will check your credit and might require a home appraisal to firmly establish the fair market value of your property and the amount of your equity. Several weeks or more can pass before any money is available to you.
Lenders commonly look for, and base approval decisions on, a few factors. You’ll most likely have to have at least 15% to 20% equity in your property. You should have secure employmentat least as much as possibleand a solid income record even if you’ve changed jobs occasionally. You should have a debt-to-income ratio, also referred to as “housing expense ratio,” of no more than 36%, although some lenders will consider DTI ratios of up to 50%.
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What Is Equity Release And How Does It Work
Equity release is a way to unlock the value of your property and turn it into cash. You can do this via a number of policies which let you access or ‘release’ the equity tied up in your home, if you’re 55+. You don’t need to have fully paid off your mortgage to do this.
As a rule, you can either take the money you release in one lump sum, in smaller amounts over time , or as a combination of both. Yet make sure you do it in the right way as if you get it wrong, it can prove expensive, as these tweets show:
Found out my mum had done this when she was hospitalised, it was 8% we now have to sell the house, she will owe approx 106k
Danny
The most common form of equity release is a mortgage that isn’t paid off until you die. So if you have no one to leave your assets to, it’s a decent, though expensive, route to raise cash.
If you do have people to pass assets to, equity release generally means there will be less for them to inherit. Then again, it is your money, so prioritise your own standard of living.
The products available to free up cash fall in to a couple of different camps:
If The Report Expires
If your application has not completed after the 3 months, you must get a letter from RICS confirming the valuation can be extended for another month.
This letter must be:
- from the same RICS surveyor that made the valuation
- provided on the companys headed paper addressed to Homes England
- in PDF or a digital format that you cannot edit
If the repayment process does not complete in the additional month, youll need to provide a desktop valuation report.
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Fixed Versus Variable Interest Rate
The interest rate on a loan can be fixed for its entire term or it can vary during its repayment period. Some loan offers include an initial period of a fixed rate followed by a period in which the interest rate varies depending on some financial index or other metric. Variable rate loans usually offer better initial terms but may result in significantly higher rates in certain economic conditions. Fixed rate ones are usually short term. When they are for a longer period they may result in both lower or higher than market rates, depending on money market cycles.
How Long Are Home Equity Loan Terms
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A home equity loan is a lump sum of cash paid to you and secured by your home. Depending on your lender, home equity loan terms can range from five to 30 years.
Homeowners across the U.S. have collectively gained more than $1.5 trillion in home equity during 2020, according to data from CoreLogic. Turning that equity into spendable cash sounds attractive if you need to consolidate high-interest debt, expand a business or replace an aging roof.
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Home Equity Loan Pros And Cons
Before deciding upon a home equity loan, consider the advantages and disadvantages.
Advantages of a Home Equity Loan
- Rates Are Lower:With your home serving as collateral, you wont pay as much interest as an unsecured loan with no collateral.
- Tax Benefits:If you use the loan to improve your home, you can deduct the interest when you itemize your taxes.
- Large Funds:Home equity loans probably provide more funds than any other source, including personal loans and credit cards.
- Flexibility: Whether its a need or a want , home equity loans can be used for any purpose.
Disadvantages of a Home Equity Loan
Increase Your Monthly Payments
Perhaps the most straightforward and simple approach to paying back your home equity line of credit faster is to pay more than the minimum required amount on a monthly basis. Any additional funds made towards your credit payments reduce the principal on your debt. This, in turn, reduces the amount of interest generated from your loan and ensures that you can pay back the money you owe as quickly as possible.
This straightforward strategy lets you establish your own payment amounts that do not strain your budget. Although paying your monthly minimum is essential, taking a proactive approach and channeling additional funds towards this debt is at your discretion. You can skip a month or two if money is tight or add a more substantial amount to pare down the principal with a Christmas bonus or tax return if you choose.
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Be Aware That Equity Releasing Can Affect Your Benefits
Having cash rather than a property can affect the benefits you’re entitled to, for example, pension credit, universal credit and others. So if you’re entitled to those, check the impact of equity releasing first. If you’re unsure, ask an equity release adviser to check what the impact would be.
This is the first incarnation of this guide. Please tell us your experiences in the Equity release discussion.
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How To Use Home Equity
Equity is an asset, so it makes up a portion of your total net worth. You can take partial or lump-sum withdrawals out of your equity if you need to, or you can save it up and pass all the wealth on to your heirs.
There are a few ways you can put your asset to work for you if you decide to use some of your home equity.
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How A Heloc Affects Your Credit Score
Although a HELOC acts a lot like a credit card, giving you ongoing access to your homes equity, theres one big difference when it comes to your : Some bureaus treat HELOCs of a certain size like installment loans rather than revolving lines of credit.
This means borrowing 100% of your HELOC limit may not have the same negative effect as maxing out your credit card. Like any line of credit, a new HELOC on your report will likely reduce your credit score temporarily. However, if you borrow responsibly making timely payments and not utilizing the full credit line your HELOC could help you improve your credit score over time.
Transfer Your Home Equity Line Of Credit
When your mortgage comes up for renewal, you may consider transferring your mortgage and home equity line of credit. Youll likely have to pay legal, administrative, discharge and registration costs as part of the switch.
You may also be required to pay off all other forms of credit, such as credit cards, that may be included within a home equity line of credit combined with a mortgage.
You may be able to negotiate with a lender to cover some costs to transfer any credit products you may have. This can be difficult if you have different sub-accounts within your home equity line of credit combined with a mortgage that have different maturity dates.
Ask your lender what transfer fees apply.
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Home Equity Loans: A Complete Guide
Home equity loans are a useful way to tap into the equity of your home to obtain funds when your assets are tied up in your property. Theyre generally offered at lower interest rates than other forms of consumer loans because they are secured by your home, just like your primary mortgage.
Read on to learn more about home equity loans and other ways to take advantage of your equityto decide if this loan option isright for you.
How Will You Use Your Home Equity In 2022
In the end, the way you decide to access and use your home equity is up to you. Whatever path you choose should be based on your financial situation, so dont make that choice until youve got all the advice you can and weigh all your options equally. If youre having trouble figuring out which solution will suit your needs best, Loans Canada can help match you with the right home equity loan product and licensed specialist.
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
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Remortgaging At A Higher Loan
In an ideal world, the value of your home will have increased enough in the first five years to easily pay off the equity loan when remortgaging without increasing your monthly repayments.
But in a market where values are stagnating, that wont be the case for some homeowners.
The good news is that some lenders will allow you to remortgage as high as 95% loan-to-value , meaning you can borrow more and settle the equity loan as part of the process.
The upside of doing this is that you wont need to pay the interest and youll benefit from any future uplift in the propertys value. The downside, however, is that remortgaging at a higher LTV will increase your monthly repayments.
The criteria used by lenders for Help to Buy remortgaging vary, so you may find it helpful to speak to a whole-of-market mortgage adviser, who will be able to pinpoint the right deal for your circumstances.
