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Interest rates aren’t great right now — at least on most consumer borrowing products. If you’re a homeowner, though, you actually have access to some of the lowest-rate options around: Home equity loans and home equity lines of credit (HELOCs).
Both these options offer fairly affordable interest rates, specifically when compared to high-rate alternatives like personal loans and credit cards. And they’re fairly easy to get, as long as you have enough equity built up in your home.
But borrowing from your home equity is a little different than taking out a credit card or unsecured loan. So you’ll want to be informed before formally withdrawing equity. We asked some home equity lenders about the questions they’re often asked about — and what you need to know before diving into the home equity process yourself.
Start by seeing how much home equity you could withdraw here.
4 home equity borrowing questions lenders say they’re often asked
Here are four questions the lenders we spoke to said they’re often asked by homeowners about home equity borrowing:
What’s the difference between HELOCs and home equity loans?
The two main types of home equity borrowing products are HELOCs and home equity loans. And while both let you take money out of your home equity, they aren’t the same.
“A HELOC is a line of credit so you do not have to take all the money at once,” says Jennifer Beeston, executive vice president of national sales at Rate.com. “You can take it as you need it. With a home equity loan, you are taking the money out in a lump sum upfront.”
Another key difference lies in how interest works on these products. First, home equity loans come with fixed rates, giving you a set payment for the entire loan term. HELOCs, on the other hand, usually have variable interest rates, which can go up or down depending on the market.
“HELOCs will often utilize variable interest rates that adjust based on the index they are tied to,” says Scott Bridges, chief consumer direct lending production officer at PennyMac. “This means your payment may fluctuate over time.”
As far as which product you should get, it depends on your goals, experts say.
“HELOCs are a good option for ongoing costs or projects where expenses may vary,” Bridges says. “Home equity loans are better suited for those that want their cash all at once, where you know the amount needed for debt consolidation, major expenses, or home renovations.”
Compare your HELOC and home equity loan options here to learn more.
How much can I borrow?
How much you can borrow will depend on the lender you choose, but typically, you can take out somewhere between 80 to 90% of your home’s value, minus your current mortgage balance. So, if your home is worth $400,000 and you have a mortgage balance of $150,000, you could potentially borrow around $210,000 using a home equity loan or HELOC (400,000 x .90 – $150,000).
“The exact amount depends on your credit score, income, and lender guidelines,” says Brett Schiffer, chief credit officer at CrossCountry Mortgage. John Aguirre, a mortgage originator at Loantown, works with his equity clients to “come up with a thorough plan” before determining how much they should borrow, he says.
“It’s a plan that outlines how much they need, plus a small pad for unforeseen expenses that arise,” Aguirre says.
What are the rates and fees?
Like all mortgage products, the interest rate you will get on a home equity loan or HELOC will depend on your financial details, as well as the value of your house. Historically, home equity loans have had lower interest rates than HELOCs, though that hasn’t been the case in the last few months.
Either way, “To qualify for the lowest rates, a credit score of 740 or above is ideal,” Schiffer says. “Also, having a lower loan-to-value ratio, meaning more equity in your home, can help you secure a better rate. In general, shorter loan terms also tend to come with lower interest rates.”
Both home equity loans and HELOCs can come with closing costs, often equaling somewhere between 2 and 5% of the loan amount. Some lenders may waive closing costs for HELOCs, though they often come with a higher interest rate or other trade-offs in return. Some HELOCs may also have annual and draw fees that Bridges advises borrowers to look for, too.
What can I use the money for?
Technically, you can use the funds from a home equity loan or HELOC for virtually anything.
“One of the biggest advantages of a home equity loan is its flexibility,” Schiffer says. “Common uses include paying off high-interest debt, taking care of emergency expenses, renovation projects, financing a child’s college education, paying for a wedding, buying a car, and increasing funds in savings and retirement accounts.”
Some borrowers even use the money to purchase additional properties.
“We’re seeing many clients use home equity lines to cover down payments and closing costs on investment properties,” Schiffer says. “This effectively leverages their home equity to build a portfolio of income-generating real estate.”
Know the risks
Home equity loans and HELOCs can be affordable ways to borrow cash, but make sure you’re prepared for the payments they come with before taking one out. With home equity products, your home serves as collateral, so if you miss payments, your lender could file for foreclosure and seize your house.
If you’re not sure a home equity loan or HELOC is the right move for your finances, talk to a mortgage professional or financial advisor first. They can help you make the right decision for your specific situation. Learn more here now.