How long does it take to get a home equity loan? A home equity loan is a loan available for homeowners who borrow against their existing home equity, using the house as collateral for the loan. The available loan amount is based on how much equity you have achieved with your house. Equity is based on a home’s appraised value minus the remaining amount you owe on the mortgage.
People often use home equity loans for home improvement projects, college tuition for children, or other big expenses. It serves as a second mortgage, and you must make monthly payments in addition to your existing mortgage. How long it takes to get one depends on several factors, only some of which are in your control.
Home Equity Loan Features and Benefits
Home equity loans have several benefits for those who need to tap into cash. A home equity loan can involve fewer steps than refinancing a home, and you will receive a lump sum of cash. Another option is a home equity line of credit or HELOC, which acts more like a revolving credit account, allowing you to borrow against your home’s equity over time.
For home equity loans or HELOCs, you repay the loan over time and can even extend the repayment period beyond the terms of your primary mortgage. It’s possible to use a home equity loan to pay off a mortgage if you can find a lower interest rate than your existing mortgage, but you have to factor in closing costs with a home equity loan and possible prepayment penalties if you wish to pay the loan off early.
Related Article: HELOC Vs. Home Equity Loan
Home Equity Loan Benefits
- Consistent Monthly Payments: The best home equity loans provide the benefit of consistent monthly payments. You don’t have to worry about variable interest rates or balloon payments that come with other borrowing options. It makes budgeting easier. The best budgeting apps can help with mortgages and the rest of your monthly expenses.
- Extended Repayment Periods: Home equity loan terms typically run between five and 30 years. You have the option to select up to 30 years for a home equity loan, which can extend longer than your primary mortgage and give you some additional flexibility.
- Larger Borrowing Amount: Assuming you have at least 20% home equity already, you can tap into tens of thousands of dollars at once. Credit cards and home equity lines of credit provide access to cash, but both can come with high interest rates and lower borrowing limits.
Home Equity Loan Pros and Cons
Home equity loans have their pros and cons. Applying for one depends on your situation and financial needs. You can access large amounts of money at once, but you’re on the hook for a second mortgage. If you fail to make a payment, a lender can foreclose on your home.
Pros
- Fixed Interest Rate: A big advantage of a home equity loan is its fixed interest rate. Home Equity Lines of Credit (HELOC) rates change monthly, which isn’t great for budgeting purposes. HELOCs also only allow you to draw from your equity for a period of 10 years. Home equity loans can extend up to 30 years, but you only receive the money in a lump sum when you’re approved for the loan.
- Home Equity Lines of Credit: HELOCs allow you to borrow money against the equity of your home up to your approved spending limit. These have a draw period lasting from three to 10 years and a repayment period lasting between 10 and 20 additional years.
- Tax Benefits: With a home equity loan, you can deduct the interest payments you make on the loan when you use the fund to buy, build, or substantially improve your home.
- Lower Rates Possible: Interest rates fluctuate throughout the year, and you might find a lower interest rate for a home equity loan than your existing mortgage rate. It might be tempting to refinance your home if you find a lower rate, but refinancing means a new mortgage at a new appraised value. If your home has increased in value, that can mean a bigger mortgage.
Cons
- Added Expense: A home equity loan adds to your monthly expenses because you need to repay the loan. You need to adjust your budget and perhaps your spending to account for the added expense.
- Higher Rates than HELOCs Possible: Depending on a home equity line of credit (HELOC), a home equity loan rate might have a higher rate than a HELOC. HELOCs typically have a higher interest rate than home equity loans, but interest rates change frequently, which is their primary disadvantage.
- Must Pay Closing Costs: Home equity loans require that you pay closing costs on the loan. There are also additional fees like an origination fee, an appraisal, recording fees, and title fees.
Related Article: Can I Use a Home Equity Loan to Pay Off Debt?
How to Get a Home Equity Loan
The home equity loan process involves several steps. The most important things involve qualifying for a loan. You have to have at least 20% equity in your home. Some lenders can allow as little as 15% but the industry standard stands at 20%.
You also need to have a good credit score. Most lenders want to see a credit score of at least 700, but some will accept scores as low as 620 in certain instances. Lenders also usually require a Debt-to-Income (DTI) ratio of 43% or less of your gross monthly income.
As you prepare to apply, you will need to show adequate income history for at least two years and remain in good standing with your existing mortgage.
Gather Loan Documents
Gathering the necessary documents for pre-approval can help you speed up the entire home equity loan process. You typically need to submit copies of your last two pay stubs, bank statements from the last two months, previous two years of income tax returns, and possibly W2s.
Some lenders have streamlined the process so you can enter your banking info and pay statements on a website instead of having to gather copies of each. You also need to have a copy of your existing mortgage statement and property tax bill.
How long it takes to gather those documents depends on how much free time you have. In most instances, the information should be accessible quickly, and you can prepare all your documents in a few hours.
Related Article: Can I Get a Home Equity Loan On Investment Property?
Get Pre-approval
Getting pre-approved for a home equity loan is the first hurdle you have to clear. Depending on the lender, pre-approval can take a matter of minutes or several days. Provided you have submitted all of your documents at one time, your pre-approval should go quickly.
At the same time, you’re dependent on the lender to process your documents in a timely fashion to pre-approve you. Pre-approval can take several business days with some lenders.
Compare and Choose a Lender
Once you receive pre-approval, you can start shopping for lenders. It’s best to look around to compare rates and terms between lenders. It’s also a good idea to read the fine print to see what kind of fees you might incur. Your pre-approval will allow you to see how much you can borrow against your home’s equity.
Apply for a Home Equity Loan or HELOC
Once you’ve found a suitable lender, you will need to complete their loan application paperwork. If you’ve already provided the lender with your pre-approval information, the application should go quickly. It can take as little as a day to complete your application. However, you may need to provide additional information like a social security number, gross monthly income, and debts.
Have Home Appraised
You’ll need an appraisal to determine your home’s equity amount. After you get your home appraised lenders will have a concrete idea of how much of a loan you’re eligible to receive. The appraisal process can take between two and 10 days, depending on the appraiser’s schedule.. The actual home appraisal doesn’t take long. Home appraisers usually complete their work within 30 to 60 minutes, but the report can take longer to compile based on their workload.
Wait for Underwriting
Underwriters will evaluate your credit history. Underwriting is the longest part of the home equity loan process and can take up to a month to complete. Lenders will thoroughly study your finances and credit to evaluate your financial situation to make sure you can afford a second mortgage.
Underwriters will pay special attention to any unusual deposits and withdrawals from your accounts, especially any large deposits. You can help yourself by answering any questions promptly and sending all requested documents quickly.
Close on Home Equity Loan
Closing on your home equity loan usually takes a day to complete. After you’ve completed the closing process and paid any closing costs, you should receive funding in three or four days. There is a three-day period to allow you to cancel the home equity loan, also called the right of rescission, as mandated by the Federal Trade Commission.
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How Long Does it Take to Get a Home Equity Loan?
It can take between two weeks to two months to get a home equity loan. If you choose a lender like LendingTree, you can expect a home equity loan to get processed within four weeks. The length it takes to get a home equity loan depends on your financial situation and whether you meet the qualifications.
If you have solid credit and meet the home equity standards, your home equity loan request can move faster. If you prepare yourself ahead of time by gathering all the necessary documents and shopping around for a lender, you can also save yourself some time.
While you can do as much as you can to prepare yourself for the home equity loan process, you’re still beholden to mortgage underwriters and home appraisers, who can move at their own pace.
Depending on the market and their workload, your loan application can take longer. If rates drop, appraisers can find themselves booked for weeks, leaving you waiting for a home equity loan approval. Mortgage underwriters can also get bombarded by demand should rates drop as more people seek homeownership or refinancing.
