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Home Equity Lending

About Home Equity Products

A Home Equity Loan (HEL) and Home Equity Line of Credit (HELOC) are loan products that allow a borrower to access the available equity in their property for a variety of reasons such as bill consolidation, large purchases (including home purchases!), home improvement and virtually any other reason.

The primary difference between a home equity loan and a home equity line of credit is that a HEL typically acts as a fixed-rate installment loan while a HELOC acts as a revolving line of credit (think credit card) with a variable rate that can be drawn down and paid back multiple times during the draw period without a new application. 

Home Equity LoanHome Equity Line of Credit
Home Equity Loan (HEL) is typically a 2nd lien, fixed-rate (some lenders offer variable rate HELs), fully amortizing loan which disburses the entirety of the approved amount all at once and is paid back in fixed installments over a predetermined period.Home Equity Line of Credit (HELOC) offers the borrower access to up to the entirety of their approved loan amount through the end of the draw period (the time the borrowers may access additional funds up to the credit limit from the same approved line of credit).

Once a draw period has ended, the outstanding balance of the HELOC typically converts to an amortizing fixed-rate loan with a predetermined repayment period. Regular payments made during the draw period will typically be interest only until the draw period ends and become fully amortizing (principal & interest) during the repayment period.

Eligibility Notes

Both HELs and HELOCs can be placed in 1st lien position, or 2nd lien position behind an existing mortgage. Most lenders begin to offer HEL/HELOC products to clients with a minimum credit score of 620 but requirements do vary from lender to lender.

Processing Notes

The process of obtaining either home equity product is very similar to a traditional 1st lien mortgage. Your borrower will be required to submit an application, provide financials, order an appraisal, and satisfy Title and HOI requirements. For most transactions, we should be able to process the request in ~30 days.

Benefits of a HEL or HELOC

  • Preserve the low interest rate of a 1st mortgage.
    A 2nd lien HE product doesn’t affect the rate or term of an existing mortgage, which may benefit borrowers who are already locked into a low rate mortgage.
  • Faster underwriting turn-times.
    HELOCs and HELs are typically underwritten exclusively through an automated underwriting system and require less manual review and approvals, shortening the time between application and funds-in-hand.

Benefits of a HELOC

  • Access to funds or a “security blanket.”
    Having access to a large line of credit anchored by your home’s equity can provide peace of mind for many borrowers unsure about their future plans.
  • Lower, interest-only payments during the draw period.
    Borrowers can leverage lower payments during an interest-only draw period to keep their monthly obligations under control and help chances of qualifying by lowering DTI.
  • Only pay for what you need.
    Instead than a fixed rate, one-time disbursement, a line of credit will save borrowers on their monthly payments if not all funds are needed immediately.
  • A revolving line of credit is particularly useful for longer home improvement projects or college tuition that can be disbursed annually.

Drawbacks of HELs or HELOCs

  • Home equity products are often considered riskier than a mortgage (especially in 2nd lien position) and will often have a higher interest rate than a traditional 1st lien mortgage.
  • Home Equity products are not government-backed, meaning there are fewer affordable product programs for borrowers with lower income/credit/down payment.
  • If the debt is in a 2nd lien position, it will be a brand new loan with a separate payment, which means one more bill to keep track of.
  • Variable rate is a riskier feature than fixed rate and leaves borrowers exposed to interest-rate volatility, and additional disbursements may increase the payment if the borrowers are not responsible with their available funds.
  • Unable to estimate future payments