Home equity line of credit Archives

January 25, 2021January 5, 2023

How to Get Equity Out of Your Home: 5 Solutions

When it comes to financing your home, one size doesn’t fit all. And while traditional options like loans, home equity lines of credit (HELOCS), refinancing, and reverse mortgages can work well for some homeowners, the recent rise of loan alternatives like home equity investors and other emerging platforms have made it clear that there’s a growing demand for other choices. Learn more about alternative ways to get equity out of your home, so you can make a more informed decision.

Traditional Options: Pros and Cons

Loans, HELOCs, refinancing, and reverse mortgages can all be attractive ways to tap into the equity you’ve built up in your home. However, there are often as many disadvantages as there are benefits — so it’s important to understand the pros and cons of each to understand why some homeowners are seeking financing alternatives. See the chart below to quickly compare loan options, then read on for more details on each.

Home Equity Loans

A home equity loan is one of the most popular ways that homeowners access their equity. There are certainly advantages, including a predictable monthly payment due to the loan’s fixed interest rate, and the fact that you’ll receive the equity in one lump sum payment. For this reason, a home equity loan typically makes sense if you’re looking to cover the cost of a renovation project or large one-off expense. Plus, your interest payments may be tax-deductible if you’re using the money for home improvements.

Why search for a home equity loan alternative? A few reasons: First, you’ll need to pay off the loan in addition to your regular mortgage payments. And if your credit is less-than-excellent (under 680), you may not even be approved for a home equity loan. Finally, the application process can be invasive, cumbersome, and taxing.

Home Equity Lines of Credit (HELOC)

HELOCs, a common alternative to a home equity loan, offer quick and easy access to funds any time you need them. And while you typically need a minimum credit score of 680 to qualify for a HELOC, it can actually help you improve your score over time. What’s more, you might be able to enjoy tax benefits — deductions up to $100,000. Since it’s a credit line, there’s no interest due unless you take out money, and you can take out as much as you want until you hit your limit.

But with this flexibility comes the potential for additional debt. For example, if you plan to use it to pay off credit cards that have high interest rates, you can wind up racking up more charges. This actually occurs so frequently that it’s known to lenders as “reloading.”

Another major downside that may encourage homeowners to seek a HELOC alternative is the instability and unpredictability that comes along with this option, as the variability in rates can lead to fluctuating bills. Your lender can also freeze your HELOC at any time — or reduce your credit limit — in the event of a drop in your credit score or home value.

Discover how common it is for homeowners like you to apply for home loans and HELOCs, in our 2021 Homeowner Report.

Cash-out Refinance

One alternative to a home equity loan is a cash-out refinance. One of the biggest perks of a cash-out refinance is that you can secure a lower interest rate on your mortgage, which means lower monthly payments and more cash to pay for other expenses. Or, if you’re able to make higher payments, a refinance might be a good way to shorten your mortgage.

Of course, refinancing has its own set of challenges. Since you’re essentially paying off your current mortgage with a new one, you’re extending your mortgage timeline and you’re saddled with the same charges you dealt with the first time around: application, closing, and origination fees, title insurance, and possibly an appraisal.

Overall, you can expect to shell out between two and six percent of the total amount you borrow, depending on the specific lender. Even so-called “no-cost” refinances can be deceptive, as you’ll likely have a higher rate to compensate. If the amount you’re borrowing is greater than 80% of your home’s value, you’ll likely need to pay for private mortgage insurance (PMI).

Clearing the hurdles of application and qualification can lead to dead ends for many homeowners who have blemishes on their credit score or whose scores simply aren’t high enough; most lenders require a credit score of at least 620. These are just some of the reasons homeowners may find themselves seeking an alternative to a cash-out refinance.

Reverse Mortgage

With no monthly payments, a reverse mortgage can be ideal for older homeowners looking for extra cash during retirement; a recent estimate from the National Reverse Mortgage Lenders Association found that senior citizens had $7.54 trillion tied up in real estate equity. However, you’re still responsible for the payment of insurance and taxes, and need to stay in the home for the life of the loan. Reverse mortgages also have an age requirement of 62+, which rules it out as a viable option for many.

There’s a lot to consider when looking at traditional and alternative ways to access your home equity. The following guide can help you navigate each option even further.

Looking for an Alternative? Enter the Home Equity Investment

A newer alternative to home equity loans is home equity investments. The benefits of a home equity investment, like Hometap offers, or a shared appreciation agreement, are numerous. These investors give you near-immediate access to the equity you’ve built in your home in exchange for a share of its future value. At the end of the investment’s effective period (which depends on the company), you settle the investment by buying it out with savings, refinancing, or selling your home.

With Hometap, in addition to an easy and seamless application process and unique qualification criteria that is often more inclusive than that of lenders, you’ll have one point of contact throughout the investment experience. Perhaps the most important difference is that unlike these more traditional avenues, there are no monthly payments or interest to worry about on top of your mortgage payments, so you can reach your financial goals faster. If you’re seeking alternative ways to get equity out of your home, working with a home equity investor might be worth exploring.

Is a Hometap Investment the right home equity loan alternative for you and your property? Take our five-minute quiz to find out.

YOU SHOULD KNOW

We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

December 23, 2020May 20, 2022

5 Smart Ways to Consolidate Growing Debt

Debt can wreak havoc on your ability to achieve your financial goals. That’s why it’s critical to pay off debt quickly so you can get your finances—and life—back on track. While it may feel impossible to get out of debt, consolidation can help you chip away at the burden. Here are five ways to do it.

1. Tap Into Your Largest Asset

As a homeowner, you can access your equity through a HELOC, home equity loan, cash-out refinance, or home equity investment and pay off your debts in full. A home equity investment, like Hometap provides, allows you to get cash to pay for what’s most important to you without the hassle of monthly payments or interest.

The option that will make the most sense for you depends on your debt and financial goals. Compare your options using our guide to find the best one for you.

Take our 5-minute fit quiz to get started.

2. Use a Balance Transfer Credit Card

Depending on the amount of debt you have, you may be able to transfer it all to one credit card. If you transfer it to a credit card with a 0% interest promotional period, you can avoid paying interest. You’d then have only one monthly payment while eliminating the high interest your other cards carried.

However, you’ll still need to qualify for these cards, which may require a good credit score. Plus, if you can’t pay off the debt by the end of the promotional period, you may end up paying more through higher interest. You’ll need to stick to a disciplined payment schedule if you want to avoid additional debt.

3. Take Out a Personal Loan

If you can secure a personal loan with a lower interest rate than the rate on your current debts, it may make sense to take out a loan.

Personal loans don’t require collateral. That means they don’t require you to back the loan with assets like your house or car in case of nonpayment. You’ll still need a good credit score, however, especially if you’re hoping for a low-interest rate.

4. Consider Debt Settlement

Debt settlement isn’t so much debt consolidation as it is payment consolidation. With debt settlement, a firm negotiates with your creditor(s) to lower the total amount of debt you owe. You then make one monthly payment to a settlement firm.

While that may sound ideal, you’ll want to look into the details. The process can take months, you’ll be racking up interest, in the meantime, and the firm will charge a fee. You may even have to pay taxes on the forgiven debt, and your credit score can be affected for seven years.

5. Borrow From Retirement

Consider this option with caution: If you have a retirement plan you may be able to take out a 401(k) loan. You’ll need to determine if your specific plan allows this and its terms. If you pay the loan back on time (usually five years), the cost to you is relatively low. The interest you pay on the loan actually goes back into your own account. You can also repay the loan without prepayment penalties and many plans may allow you to take payments out of your paycheck.

Over 50 and have $0 for retirement? Here’s your roadmap to get on track >>

But if you don’t pay your loan back on time, you’ll likely have some serious setbacks. At this point, it’s considered an early withdrawal, which means you’ll face a penalty and income tax. You’ll also want to consider your job status. If you leave your job, you’ll have to pay the loan back within 60 days.

Take our 5-minute quiz to see if a home equity investment is a good fit for your debt consolidation goals.

DISCLAIMER

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.

June 25, 2020June 23, 2022

Understanding HELOCs vs. HELOC Alternatives

Many homeowners stumble across home equity investments as they’re doing their research about the best alternatives to home equity lines of credit (HELOCs). That’s because home equity investments are still fairly new to the home financing world, whereas HELOCs have been an option that gained popularity with homeowners in the early 2000s.

Your decision about how to tap your home equity can have consequences for years—if not decades—to come, so it’s crucial to weigh the pros and cons of HELOCs and HELOC alternatives.

As financial technology evolves, more solutions are made available to fit the unique financial needs of every kind of homeowner. But determining whether a HELOC or a home equity investment is better shouldn’t be overwhelming. Understanding the benefits of each and why homeowners tend to choose one over the other will help you make an informed decision about the best option for you and your property.

What is a Home Equity Line of Credit (HELOC)?

A home equity line of credit, or HELOC, is a loan that functions much like a credit card. During the “draw” period (usually 10 years), you can access the equity you’ve built up in your home as needed. During this period, you’ll usually make payments on interest only. Interest averages about 6.04% but this changes often.

Once the draw period ends, you enter the repayment period (typically 20 years). You’ll pay back the money you borrowed, plus any remaining interest.

Alternatives to HELOCs: the Home Equity Investment

A home equity investment allows you to access a portion of your equity in exchange for an investment in the future value of your home. You receive a lump sum of cash, but since it’s an investment and not a loan, there are no monthly payments and no interest. Instead, you settle your investment either when you sell your home or with savings or a loan. The amount you owe depends on your home’s value at the time of settlement. The effective period for settling is typically between 10-30 years, depending on the investor.

The Difference Between a HELOC and Home Equity Investment

The biggest difference between a HELOC and an equity investment is a HELOC is a loan and a home equity investment is not. Because the settlement amount is based on the home value, an investor isn’t guaranteed to make a profit like a lender is. If the property goes down in value, for example, the share that is owed back to the investor could be less than the initial funds given to the homeowner.

There are some other key differences that will help you decide if a HELOC alternative like Hometap’s home equity investment is a better fit for you.

When a HELOC is a Good Fit

The advantages of a HELOC include having the flexibility to use your line of credit when you need it and not having to pay interest on the money you don’t use (however, check minimum draw requirements first, as you may have to take money even if you don’t have a need).

This may work best for a homeowner who doesn’t have an emergency fund. A HELOC can offer a safety net. You usually have a 10 year “draw” period, meaning if you have a medical emergency five years from when you opened the credit line, you can access funds without having to go through the loan process again.

You may decide a HELOC is the better option based on the amount of funds you anticipate needing. Lenders can allow 75-85% of your available equity to be borrowed, whereas a home equity investment is typically up to 30% or $300,000.

If you have no plans to ever sell your home at any point, you may find a HELOC makes more sense. While it’s not necessary to sell when using a home equity investment, many homeowners use the sale of the home to settle the investment at the end of the term. Otherwise they can choose to refinance, take out a loan, or use savings to settle the investment.

When It’s Time to Consider an Alternative to a HELOC

Many debt-adverse homeowners, particularly those looking to reduce existing debt, opt not to use a HELOC because the monthly payments and unpredictable interest rates threaten to dig them deeper into debt. A 2019 study of U.S. homeowners found that 73% of people want financing solutions that don’t create more debt. A home equity investment is debt-free, and there are no penalties for early repayment.

If your expenses are a little unpredictable, an equity investment might also be preferable to a line of credit. Home renovations, for example, can often go over the original budget, and a lump sum of cash makes it easy for homeowners to make adjustments as a project progresses, versus drawing more funds as needed.

Homeowners that don’t fit into the typical box often find that a home equity investment is the better option, as well. For example, entrepreneurs that don’t have a typical W2 or high credit score may not qualify for a HELOC despite having the equity and the financial standing to pay it back.

There’s no one-size-fits-all when it comes to tapping into your home equity. Comparing a home equity line of credit and a home equity investment with your specific goals and financial situation in mind is the best way to determine which one makes most sense for you.

Compare all your options for tapping into your home equity with this in-depth guide >>

Take our 2-minute quiz to see if a home equity investment is a good fit for you.

YOU SHOULD KNOW

January 28, 2020June 23, 2022

Comparing a Home Equity Loan vs. a Home Equity Investment

As a homeowner, so much of your worth is tied up in one illiquid asset — your home. Fortunately, you have the advantage of being able to tap into your home equity to fund other goals, such as paying off debt, starting a small business, funding an education, or renovating your home.

You have a number of ways to access your equity, too. To meet your short- and long-term financial goals, you’ll want to understand all your options before moving forward.

Understanding Your Finance Options

What is a Home Loan?

A home loan or home equity loan allows you to borrow against the equity you’ve accrued, using your home as collateral to guarantee the loan, and is granted by a lender, like a mortgage company, credit card company or a bank or credit union.

What is a Home Equity Investment?

Home equity investments give you cash today for a portion of the equity you’ve accrued in your home in exchange for a share of the future value of your home. Since it’s an investment, not a loan, there are no monthly payments and no interest. There is typically an effective period in which the homeowner is given to settle the investment, either through the sale of the home or by other means.

What is a HELOC?

A home equity line of credit or HELOC is like a credit card: you can borrow money using your home’s equity as a source of funds. Typically, HELOCs have annual fees and require you to draw a minimum amount each year. You have a period where you can draw money—in some cases up to 10 years—and then a repayment period.

What is a Cash-Out Refinance?

A cash-out refinance replaces your existing mortgage with a new home loan for more than you currently owe on your house. That means you get a larger sum of money than what you owe. Most people use a cash-out refinance to pay down debt or increase their home’s overall value through strategic home renovations.

Compare Your Options

Home Loan vs. Home Equity Investment

According to Hometap’s 2019 Homeownership Survey, when asked how homeowners feel about their options for accessing their home equity, 37% of homeowners answered that while they could get a home equity loan, but prefer not to, while 12% said they have no good options at all for turning the equity in their homes into cash.

That’s because many homeowners, particularly those looking to reduce debt with their home equity, don’t like the idea of an additional monthly payment or unpredictable interest rates. With a home equity investment, you’re not taking out a loan so there are no monthly payments and there’s no interest. Instead, you’ll settle your investment when you sell your home or if you decide to buy out your investment once the term is up. If you plan on selling your home within 10 years, you may find this is the smartest option for you.

If you plan on staying in your home for more than 10 years, you’ll want to determine if you can settle your home equity investment when the time comes. Generally, homeowners settle their home equity investment by selling their home or buying out the investment with savings or refinancing. If you know you want to stay put, you may decide a home equity loan or other loan is the best fit for you.

Cash-Out Refinance vs. Home Equity Investment

With a cash-out refinance, you’re taking out a larger mortgage, so may have bigger payments than you do now and more interest over the life—often 15 to 30 years—of the loan. But, if you can find a better interest rate than your current mortgage, it may prove to work for you in the long run, particularly if you’re looking to fund something like higher education and can secure a lower interest rate than private education loans.

If a cash-out refinance won’t lower your interest rate, then you’ll want to look to your alternatives. Average interest rates for home equity loans are often higher, but the terms are shorter and your original mortgage—and its interest rate—won’t change.

It’s also a smarter choice if you don’t need a large sum of money. For example, if your debts total $25,000, you may find a home equity loan can help you pay it down while a cash-out refinance gives you access to more money than you need—with expensive closing costs, longer terms, and more interest over the years.

With both a cash-out refinance or home loan, you can face foreclosure if you default on your loan.

HELOC vs. Home Equity Investment

While HELOCs often have lower interest rates than home equity loans, they’re often variable, meaning you may start a low interest rate but then face high interest rates that make monthly payments more difficult. As with other loan options, you risk foreclosure if you default on your HELOC. HELOCs also have significant penalties for prepaying your loan. They often make sense when you aren’t sure how much money you need or when you’ll need it, since you have access to a revolving credit line for a set amount of time.

Home equity loans may be a smarter option than a HELOC when you know you have a large expense, like a home remodel or funding college tuition. They are also more useful for consolidating debt because you get a single payment, often with a lower interest rate than the interest rate on your debts.

So, what’s the best home financing option?

The option that’s best for you depends on your goals and financial situation. Take the time to compare not only the terms of each type of loan or investment product, but the qualifications for each, too. The following comparison chart helps put some of these details into perspective:

You may find that boosting your credit score is the first step to accessing your home equity the way you want. Or you may find that you need to build more equity in your home before you can use it to fund your other financial goals.

By doing your research, you’ll be able to tap into your home equity with confidence, knowing you’ve made the best choice for your financial health.

See if you prequalify for a Hometap investment in less than 30 seconds.

YOU SHOULD KNOW

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.

October 29, 2019January 5, 2023

4 Ways to Finance Your Home Addition or In-Law Suite

Are you looking for ways to finance a home addition? Across the country, the number of people living in multigenerational households is on the rise. According to the Pew Research Center, more than 20% of the population shares their homes with at least one other adult generation. That’s up from 12% in 1980.

Enter the in-law suite: They empower multiple adults to live under the same roof while still maintaining separate living spaces. Below, we’ll cover the different cost aspects to consider, the different types of additions, and how to finance a home addition.

Comparing the Costs of In-Law Suites, Nursing Homes and Assisted Living Communities

For some families, having a parent or grandparent move in makes smart financial sense. Especially if said parent or grandparent needs extra help with their day-to-day activities, has mobility issues, or health issues that need close looking after.

If you compare the cost of paying rent at a nursing home or assisted living community versus building an in-law suite, it may make more financial sense for your situation, even if you factor in the cost of a companion or visiting nurse to help with chores and caregiving.

Read 3 Ways Home Equity Can Fund Your Retirement

Added bonus: The in-law suite could be used for other purposes—an Airbnb rental, guest house, or office—when it’s not needed by a family member.

Is an In-Law Suite Right for Your Family?

The first question to ask yourself before starting your in-law suite journey might not be what you’d think: Is it legal?

Many neighborhoods, cities, and counties have rules regarding the size and types of additions you can build on your home or how you can remodel a space like a garage or basement. When it comes to building a separate structure, often referred to as an accessory dwelling unit, or ADU, the rules may be even tighter.

Start by calling your city’s zoning office to find your area’s rules and regulations. Then contact a builder or architect for a vision of what’s possible within those limitations. If substantial renovations are needed, you can consider expanding your liability coverage as it could help cover legal fees if someone injures themself on your property. As more people will be going in and out of your house, it could be helpful to look into how multigenerational housing will impact your home insurance policy moving forward.

Before you break ground, it’s also important to consider the emotional impact of having family members move into what was previously your personal space. Your parents or grandparents may also have concerns about moving in together. Establishing open lines of communication early in the process will help ensure the arrangement is a success.

Using Home Equity to Finance a Home Addition

Once you’ve done your research and talked with your family, then it’s time to consider your funding options. Here are some of the best ways to finance a home addition like an in-law suite.

1. Home Equity Loans

A home equity loan will give you a large chunk of cash you can use to finance the construction of your in-law suite. Your loan may have a fixed or variable interest rate. In general, home equity loans offer shorter maturities than the original mortgage you took out on your home (meaning you’ll have to pay them back faster).

2. Home Equity Lines of Credit

A home equity line of credit (HELOC), is a revolving loan. It works in a similar fashion to your credit card. Your lender will set aside a predetermined amount of money that you can borrow from at any time. During the “draw period,” typically five to 10 years, you can borrow as much or as little as you need to fund your in-law suite construction. Some HELOCs require you to pay back everything you borrowed as soon as the draw period ends. But most offer a payback period of up to 20 years, during which you pay back the interest and principal in regular installments.

3. Reverse Mortgages

Homeowners who are 62 and older have an additional option for financing the construction of their in-law suites: a reverse mortgage. This program allows them to borrow against their home equity without having to pay an additional monthly fee. But there is a catch: The loan has to be repaid as soon as the borrower passes away or moves out of the home. This is usually accomplished by selling the house. If you want to leave your home to children or other family members, this may not be the best option.

4. Home Equity Investments

Unlike traditional home equity loans or lines of credit, there are no monthly payments or interest when you use a home equity investment product like Hometap. Instead, you offer the equity investment provider a share in the future value of your home in exchange for a lump sum of cash. You get the money you need now to finance your in-law suite, without having to deal with a new loan or credit program.

If you’re looking for the best way to finance a home addition, the answer isn’t one-size-fits-all. It will depend on your financial goals, you, and your property.

If building a home addition makes sense financially and emotionally for your family, compare your funding options to determine which solution is best for you.

Take our 5-minute quiz to see if a home equity investment could be the solution for you to finance your home addition.

YOU SHOULD KNOW…

April 29, 2019June 23, 2022

Getting Out of Student Loan Hell: Should You Use Your Home Equity?

The equity in your home, when used correctly, can be a powerful tool in reaching your financial goals. As a homeowner with student loans, that equity can possibly help you lower your monthly payments and interest rates while finally getting out of student loan hell. (And remember: There isn’t any real tax benefit of carrying student loans.)

However, before you commit to using your home equity to pay off student loans, start by comparing your various options for tapping into your home equity. The last thing you want to do is trade one loan for another—potentially with worse interest rates or monthly payments that don’t work with your current financial situation.

Lower Your Home Interest Rate and Get Cash

Cash-Out Refinance

According to Zillow, a cash-out refinance is great for paying off high-interest debts. However, you’ll want to make sure you can find lower interest rates. If much of your student debt is from high-interest private education loans, you may find the math works in your favor.

See how your student loan balance compares to homeowners like you in our 2021 Homeowner Report.

Interest rates for cash-out refinancing are generally lower than home equity loans and HELOCs, but don’t be fooled into thinking it’s the best option based on that one number. Factor in closing costs, how much interest you’ll pay over the term of the loan, private mortgage insurance, and any other fees that may come with a cash-out refinance to find the true cost. Calculate whether a cash-out refinance will lower your interest rate and, if it won’t, consider other ways to access your home equity.

Cash-Out Refinance vs. Home Equity Loan: What’s the Difference?

Get One Lump Sum of Cash

Home Equity Loan

If you can’t find lower interest rates via a cash-out refinance, a home equity loan can give you access to cash without refinancing your home. This loan is separate from your mortgage and gives you access to the equity you’ve built in your home in one large lump sum.

With an average 5.5% interest rate for a 10-year fixed term, home equity loans may allow you to consolidate your student loan debt in one single payment at a lower interest rate. For a $100,000, 10-year loan, you can expect a monthly payment around $1,500, depending on your credit score. Estimate how much your monthly payments would be based on your home value, credit score, and other factors. If you can’t keep up with the monthly payments, you may want to forgo a home equity loan so you don’t risk losing your home.

HELOCs & Home Equity Loans: What’s the Difference and Is Either Right for You?

Use Your Equity Like a Credit Card

HELOC

If you don’t need money in one lump sum and want to withdraw it as you need it (up to a certain amount), a HELOC may be your best option. For Josh and his wife Lauren, bloggers at Money Life Wax, a HELOC offered a way to break through interest of student loans and start paying off the principal. “Instead of paying $325 in interest each month, we are paying closer to $80.”

However, HELOCS often have variable rate interest, meaning rates may go up and you can’t be certain about how much interest you’ll pay over the course of the term. As with a home equity loan, you want to estimate your payments based on your situation and, if the payments are too much, reconsider so you don’t risk foreclosure.

Access Equity Without Monthly Payments

Hometap

If you have equity built up in your home that you want to access but don’t like the idea of taking on additional debt or monthly payments (plus interest), a Hometap Investment can be a smart alternative. “This was a great choice instead of a second mortgage!” says John C., a homeowner who used Hometap to pay off education loans.

However, if you know you want to stay in your house for more than 10 years, Hometap may not be the best option for you as investments have a 10-year term. That means you have to sell your home, refinance, or buy back the investment within 10 years.

When you use your home’s equity as a tool, you have an opportunity to better your financial situation. But remember: Everyone’s motives and methods around financial decisions are personal; there’s no “right” answer besides the one that works for you.

Before you pay off your student loans using home equity or any other means, consult a financial advisor. A financial advisor can help you do all the math to see which options may provide you with the biggest benefits and offer you professional guidance as to what makes sense for you, taking into account advantages you may lose like federal student loan benefits.

See if you prequalify for a Hometap investment in less than 30 seconds.

YOU SHOULD KNOW…

March 7, 2019May 13, 2022

HELOCs & Home Equity Loans: What’s the Difference and Is Either Right for You?

When you have a financial need and are in a bind for cash, you may consider a second mortgage. While your first mortgage, or purchasing loan, is guaranteed by a lien on your home, a second mortgage lets you borrow money based on your home’s value. A home equity line of credit (HELOC) or a home equity loan are two of the most common types.

A HELOC acts as a credit card, using your home’s equity as a source of funds. A home equity loan, on the other hand, allows you to borrow against the equity you’ve accrued, using the home to guarantee the loan. But which one, if any, is right for your situation?

We asked 1,000 homeowners if they’ve considered taking out a loan, HELOC, or other financial product. See what they had to say in our 2021 Homeowner Report.

Determine if You Qualify

To qualify for either loan, you’ll need a minimum FICO score of 680, maximum loan-to-value rate of 80–85%, and maximum debt-to-income rate of 43%. Both often include prepayment penalties, with HELOCs often including cancellation fees, too.

Identify Your Need

If you have a high expense, like a remodel or college tuition, home equity loans are often a better choice because you receive a larger lump sum. These loans are also better for consolidating debt because you get a single payment, often with a lower interest rate.

As Investopedia explains, HELOCs are better for short-term financial needs since the interest of these loans can vary. They’re also good if you aren’t sure how much you need to borrow and when you’ll need to borrow it since HELOCs give you access to cash for a set period, in some cases up to 10 years.

Compare Interest Rates and Fees

Home equity loans have higher interest rates. Since they’re typically adjustable-rate loans, HELOC monthly payments and interest rates may go up, making payments irreducible. However, with either loan, you’ll likely pay a lower interest rate than you would with an unsecured loan.
Home equity loan fees typically include closing fees plus 2–5% of the value of the loan. HELOCs require $0 at closing but usually have annual fees and minimum draw requirements.

Weigh the Risks

With HELOCs, your lender may lower your credit line or even revoke it if the value of your home decreases or your financial situation worsens. Also, if you default on either type of loan, you risk foreclosure.

Consider Your Alternatives

While a HELOC or home equity loan is a viable financing option, it requires you to use your home as collateral—and defaulting on that loan could result in foreclosure. Hometap can offer you access to the equity accrued in your home in cash today without any interest or monthly payments.

See if you prequalify for a Hometap investment in less than 30 seconds.

LEGAL DISCLAIMER

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.

September 4, 2018June 22, 2022

Can You Access Home Equity with Bad Credit?

So many Americans struggle with debt. A survey conducted by Hometap in 2019 of nearly 700 U.S. homeowners showed that while many homeowners are house-rich, they’re also cash-poor, with little day-to-day liquidity. Survey takers indicated if they did have debt-free access to their home’s equity, such as a home equity advance, they’d use it to pay off credit card debt, medical bills, or even help friends and family pay off debt.

Many homeowners responded that they haven’t even considered available options to tap into their home equity. In short, they feel stuck because available financial options only seem to add more debt and interest to the homeowner’s monthly balance sheets. There’s also the issue of qualification and approval, as it’s hard to meet the requirements of many financing options, like a home equity loan, with bad credit.

The good news? This “house rich, cash poor” status quo doesn’t have to continue. Here, you’ll learn about the importance of credit, and how you can still access your home equity if yours is less than perfect.

What Is Credit and Why Does It Matter to Lenders?

Credit refers to the ability to to borrow money, obtain products, or use services while agreeing to provide payment at a later time. The term “credit score” refers to a three-digit number that indicates the level of trustworthiness you’ve demonstrated in the past through experience with creditors, lenders — basically, any company who has given you money. This information is gathered in a credit report through a variety of different sources, including the amount of credit cards you have, along with any outstanding balances on them, your history of loans and repayment behavior, timeliness of monthly bill payment, and significant problems like bankruptcies and foreclosures.

Simply put, lenders want to be as sure as possible that you’ll pay back any money they give to you, and checking your credit is an easy and relatively comprehensive method to gather this information.

If you’re carrying a lot of debt and are worried about your credit, you may think that your home equity is inaccessible. But with a new, non-debt financing option available to a variety of homeowners, you may be surprised at what you can access. Here are a few ways you can tap into your home equity to start using that liquidity to reach your financial goals. ‍

See the chart below for a quick overview of the options that might be available to you based on your credit score, then read on for more in-depth descriptions of each.

Cash-Out Refinance

A cash-out refinance is when you, the homeowner, take out a new, larger mortgage, pay off your current mortgage, and use the excess to fund your needs. This can be done through your existing lender or a new lender and is not considered a second mortgage. According to Bankrate, you typically need at least 20% equity in your property to qualify, and you’ll pay interest on the life of the loan (usually 15 or 30 years). Because of the long duration of a cash-out refi (as they’re commonly known), you’ll want to ensure the interest rate and your expected repayment plan fit into your monthly budget. Homeowners are typically required to have a credit score minimum of 620 to be approved for a cash-out refinance.

Home Equity Loan or Home Equity Line of Credit

Would you qualify for a home equity loan or a home equity line of credit (HELOC) with bad credit? First, you need to know the difference between these two home equity options.

A home equity loan allows you to borrow money using the equity in your home as collateral. A HELOC, on the other hand, works more like a credit card, in the sense that you can draw funds on an as-needed basis. With both home equity loans and HELOCs, your credit score and home equity value will play a part in how much you’ll be able to borrow and your interest rate.

The minimum credit score needed for a home equity loan and a HELOC are usually at least 620, though it depends on the lender. But even if you don’t meet this minimum credit score for a home equity loan or HELOC, you shouldn’t be discouraged. Julia Ingall with Investopedia says homeowners with bad credit should comparison shop for lenders open to working with borrowers like them. Additionally, Ingall notes that working with a mortgage broker can help you “evaluate your choices and guide you to reputable lenders.”

Home Equity Advance

A home equity advance offers homeowners the ability to tap into the future value of their home in order to access their equity now. A home equity investment is a smart way to do just that.

At Hometap, homeowners can receive home equity investments so that they can use some of the equity they’ve accumulated in their home to accomplish other financial goals . The homeowner gets cash without having to sell or take out a loan; and there is no interest and no monthly payment. . Another positive aspect of a Hometap Investment is that hundreds of factors are taken into consideration to approve an applicant — credit score isn’t the defining criterion.

Sell Your Home

For many, it’s a last resort, but homeowners with poor credit can access their home’s equity by selling it outright. Of course, this decision is predicated upon finding a more affordable house for your next home, including favorable mortgage terms for your new place, and ensuring you don’t spend too much on real estate fees or moving costs. You also may be able to improve your credit score before you reach this point. Monitoring your credit score to keep an eye out for potential disputes and discrepancies, maintaining a balance well below your credit limit, and keeping old accounts open are all good places to start.

If you’re feeling house-rich and cash-poor like so many Americans, you now have a host of options to access your home equity. As with any major financing decision, consult with a trusted financial professional to determine your best course of action, and get moving toward your goals.

See if you prequalify for a Hometap investment in less than 30 seconds.

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