Latest news with #HELOCs
Yahoo
10 hours ago
- Business
- Yahoo
Should you pay off your mortgage with a HELOC?
A home equity line of credit (HELOC) can be an attractive option for homeowners who want to access a flexible, low-cost line of credit. Some homeowners use HELOCs to cover financial emergencies and big-ticket items; others consolidate debt to make the balances more manageable. But what about using a HELOC to pay off your mortgage faster and enjoy lower monthly payments? Is it a good idea? Read on to learn the pros and cons of using a HELOC to pay off your mortgage as well as alternatives. This embedded content is not available in your region. A HELOC works like a credit card. It's a revolving line of credit that lets you borrow against your home equity, which is the difference between what your home is currently worth and how much you owe on your mortgage. You can pull funds during what's referred to as the draw period — it typically lasts up to ten years. Most lenders only require interest-only payments while the line is open. The interest rate is variable, though, so the monthly payments fluctuate. Once the draw period ends, payments increase to reflect both principal and interest. Learn more: How do fixed-rate HELOCs work, and which lenders offer them? While most homeowners commonly use HELOCs for big-ticket expenses and debt consolidation, some use HELOCs to repay their mortgages early. Flexibility: You can withdraw funds as needed and use them however you see fit. Controlled costs: You only pay interest on the funds you withdraw, giving you more control over borrowing costs. Competitive rates: You may get a lower rate than you would with other refinance options, or, in some instances, a traditional mortgage. Interest-only payments: Only paying interest during the draw period makes HELOC payments more affordable. Minimal closing cost: You can expect minimal closing costs on HELOCs. Variable rates: Most HELOCs come with variable interest rates, so monthly payments fluctuate during the draw and repayment periods. Prepayment penalties: Some lenders assess prepayment penalties if you pay a HELOC off early. Fees: Some lenders charge origination fees, annual fees, and dormancy fees on HELOCs. Risk of foreclosure: A HELOC is secured by your home, so you could lose it to foreclosure if you default on the payments. Learn more: What to expect when facing foreclosure If you choose to pay off your mortgage with a HELOC, keep these general guidelines in mind: Equity: You should have at least 15% to 20% in home equity. More equity could mean access to a larger HELOC. Credit score: Most lenders prefer a credit score of 680 or higher; 700 is even better. A strong credit score also helps you access more competitive rates. Income: Lenders want reassurance that you can afford to repay the HELOC. So, consistent, verifiable income is required to qualify. Debt-to-income (DTI) ratio: This is the percentage of monthly income spent on debt obligations. Aim for a DTI ratio below 43%. Insurance: Lenders generally require proof of homeowners insurance. Research several lenders and create a shortlist of those you may want to do business with. Get prequalified with at least three lenders and compare quotes to find the best fit. The amount you qualify for should be enough to pay off your mortgage balance. Read more: Best HELOC lenders Gather the required information and documentation. Once you've done so, formally apply with your chosen lender. The timeline from application to closing varies by lender. Upon approval, funds are generally deposited electronically into your bank account. Initiate a HELOC withdrawal to cover your home loan's outstanding balance. Pay your lender directly to satisfy your mortgage debt and begin making HELOC payments as they come due. Your mortgage balance is low. You want lower long-term housing costs. You want to shift your focus to other financial goals. You can qualify for a better rate than you currently have. You want to stop paying mortgage insurance. You plan to move soon. You're almost to the end of your mortgage term. Your lender assesses hefty prepayment penalties. You don't plan to relocate in the foreseeable future. You have a much lower rate with your current mortgage. A mortgage refinance lets you swap out your current loan with a new one, preferably with a lower interest rate and shorter term. Or you can opt for a cash-out refinance. Like a traditional refinance, it lets you swap out your current mortgage. But the new home loan is larger and includes any equity you've built up. You'll receive the difference between the new loan and what you owe in cash. Similar to a HELOC, you can borrow against your home equity with this option. But there are a few key differences between the two. With a home equity loan, you receive a lump sum and are responsible for paying interest on the entire amount. Home equity loans also come with fixed interest rates, and you can expect closing costs. A mortgage recast is also an option if you're sitting on a large sum of cash. You'd make a large payment toward the principal and ask the lender to re-amortize the remaining balance. The end result: lower monthly mortgage payments without modifying your loan terms. This service comes at a cost, though. Considering paying your mortgage off early but not right away? Paying extra each month could be more viable and cost-efficient. You could double up if there's room in your spending plan or pay whatever extra you can each month. Biweekly payments are also smart, as they equal an extra monthly payment annually. If you're at least 62, you can use a reverse mortgage to wipe away home loan debt. It pays off your mortgage, and you receive the equity in a lump sum, monthly installments, or as a line of credit. But you don't have to make payments to the lender. Instead, ownership of the home transfers to the lender if you decide to sell, relocate, or pass away. That's unless the balance, including any accrued interest, is paid in full. Learn more: HELOC vs. reverse mortgage vs. home equity loan — which one is best?
Yahoo
2 days ago
- Business
- Yahoo
What happens if you default on a HELOC or home equity loan?
Defaulting on a home equity loan or HELOC can result in the loss of your home, as it was pledged as collateral for the debt. Being in default typically occurs after four consecutive missed payments or 120 days. Defaulting also has a negative impact on your credit score and makes it difficult to secure other financing in the future. Defaulting on any type of loan is never good. However, defaulting on a home equity loan or HELOC, its line-of-credit cousin, has a much more daunting consequence: You could lose your home. Why? Because when you took out the loan, you pledged the place as collateral for the debt. If you get behind on repayments, aka 'delinquent,' the lender has a right to take your property, to recoup its money. Now, that doesn't occur overnight – a lot has to happen before an actual foreclosure. Still, a tiny section of borrowers can see those storm clouds gather. The latest data from the Federal Reserve Bank of New York shows that 0.88 percent of HELOC (home equity line of credit) accounts are delinquent by 90 days or more. While that's not a huge number, it's a noticeable uptick from the 0.52 percent of HELOCs that were in the same shape one year earlier. If you're in danger of joining those ranks, read on to understand what actually happens if you default on a home equity loan or HELOC, how the fallout will impact your finances and mortgage, and what you should do to avoid this doleful situation. To be in default on a loan simply means you have failed to make your scheduled payments on time or according to the agreed terms of the debt. Before you stay awake at night stressing about the potential to default on your home equity loan, it's important to understand that default doesn't set in after missing one payment. 'Generally, four months or 120 days of consecutive missed payments will put a loan in default and have the creditor looking to begin collection,' Pahmela Foxley, vice president of mortgage lending at Utah-based Wasatch Peaks Credit Union, says. 'This can vary from lender to lender.' Some may give you less time, some a little more. It's critical to stay well ahead of that four-month mark. Foxley says that lenders may be willing to make adjustments (for a fee) to avoid sending the loan to collections, a step that involves loads of paperwork and additional work. 'Most lenders are willing to work with their borrowers to help them,' she notes, 'so it's crucial to communicate with your lender and have them help you explore options to avoid defaulting on the loan.' In addition to worrying about the payments, you'll need to consider the fees that will likely add up in the process. Most lenders charge late payment fees for home equity loans and HELOCs. It's common to see these charges add up to five percent of the missed payment amount. Though some lenders do set maximums — Regions Bank, for example, caps its late fee at $100 — remember you'll be charged for each month you miss. Bankrate's take: If you're falling behind due to a major financial hardship – losing your job, for example – talk to your lender about forbearance, which temporarily stops or lowers your repayments. Some lenders offer forbearance options for as long as 12 months. You'll still owe the money, usually including the interest, when the forbearance period ends, but you can avoid the major damage that delinquency will do to your credit (more on that below). While home equity loans and HELOCs differ in their details, the two products work the same way if you don't live up to your obligation to make payments on time. 'Typically, there is no difference between defaulting on a HELOC or home equity loan,' Mark Worthington, branch manager at Churchill Mortgage, says. 'Both are mortgages secured against a property, so they fundamentally have the same impact on the asset in the event of a default.' The worst-case impact is foreclosure – a lengthy process that eventually leads to the lender taking possession of your home, selling it and evicting you. As with a default on your primary mortgage, it won't happen immediately. Here's a rundown of the general process: One missed payment: If you fail to make a payment during the grace period (often 15 days after the due date), you'll receive a written notice from your lender. Your next payment: Your next statement will include the past due amount, plus a late fee. Additonal missed payments: If you still fail to pay and haven't contacted the lender to discuss your options, you may receive an acceleration notice – part of the clause in your loan agreement that gives a lender the right to demand full repayment – from the lender's collections department. Notice of default: After multiple missed payments – typically somewhere between 90 and 120 days – your lender will issue a notice of default. The local real estate recorder's office in your town or county will likely receive a copy as well. Preforeclosure: The window is closing in this period. Having taken the legal action required in your state, your lender is preparing to move forward with claiming the property. However, even at this point, you have the ability to catch up your payments, request forbearance or even sell the home (which still belongs to you). Eviction and foreclosure: If you haven't managed to come to a resolution, your lender will have the right to proceed with evicting you from the property and selling or auctioning it off. But your obligations may not stop there. Let's say you owe the lender $70,000, and the home sells at auction for just $55,000. The lender could technically decide to just wipe that $15,000 off their books and move on. But often, if it's a serious shortfall, the lender likely going to do whatever it takes to get the amount repaid in full – including taking you to court. 'The lender will file [a request for] a judgment against you for the remaining balance,' Foxley says. If it succeeds,'this could lead to a wage garnishment affecting your weekly paycheck to pay the debt.' In addition to losing your home and possibly a potion of your future wages, defaulting on a home equity loan carries other serious long-term implications for your finances and financial profile. A foreclosure will remain on your credit report for seven years, so any time a company checks your credit – to rent an apartment or to consider a credit card application, for example – they're going to see a big red flag in your credit history. Keep in mind that it's not just the default, either. Making on-time payments weighs heavily on your credit score, and since you have missed multiple months, your credit score will likely be in poor shape. According to a data analysis of more than 84,000 home loans conducted by risk management firm Milliman, one missed payment on a mortgage led to an average 52-point credit score drop, while four missed payments typically translated to a collective drop of more than 98 points. A lower credit score will create major challenges to your ability to secure other loans, not to mention the best possible interest rates on them. Defaulting on your home equity financing has consequences for your other loans too – in particular, the primary mortgage on your home (unless you've paid it off). Remember, that's another lender also waiting to be repaid. You might assume that if your first mortgage is in good standing, you're still okay. However, think of it this way: You owe money to two parties. Neither is really more important to pay; they both have to get their regular payments, and if they don't, both of them have the right to your property. The home equity lender is in a tougher spot, though. If it forces foreclosure, the primary lender is entitled to recoup its outstanding balance first. 'Because [home equity] loans are usually in a second lien position behind the primary mortgage, the process is more complex and challenging for the [home equity] lender,' says Phil Crescenzo Jr., vice president, Southeast Division, Nation One Mortgage. The home equity lender has two options. It can initiate foreclosure and see how much money is left over after the primary mortgage lender is paid from the sale of the property, or it can try to buy the primary mortgage for a more direct pathway to a sale. Worthington says that lenders usually look at the available equity in the property prior to moving forward. No matter what route the home equity lender opts to take, the outcome for you, as a borrower, is the same: You're going to lose your home. And if your primary mortgage is also filed as a default – as Worthington says it typically is – it means that not one, but two, of the worst possible black marks on your credit report will follow you around for the next seven years. Many homeowners are sitting on a huge pile of home equity right now, which can offer an appealing source of cash. But accessing funds via home equity loans and HELOCs comes with a big responsibility – and risk. Defaulting on them has serious repercussions that can destroy your credit and reduce your odds of getting approved for other financing in the future – not to mention losing the roof over your head. And while they're considered second mortgages, don't let that next-in-line status fool you: Repaying them is just as essential as making your payments on your primary mortgage. Being on time with your mortgage won't save you from foreclosure if you become seriously delinquent on the home equity debt.
Yahoo
29-05-2025
- Business
- Yahoo
How to protect yourself from HELOC fraud
HELOC fraud is defined as someone stealing funds from an existing home equity line of credit or opening a new HELOC account in a homeowner's name for the purpose of withdrawing funds from it. Common scams include account takeovers, identity fraud, title fraud, and even the creation of counterfeit HELOC checks — all typically carried out via phishing or stolen data. Warning signs of HELOC fraud include unfamiliar transactions, missing statements or sudden increases in your HELOC balance or minimum payments. You can protect yourself from fraud by monitoring your account, setting up account alerts, and reporting any suspicious activity or draws promptly. Home equity lines of credit (HELOCs) are a common way for homeowners to borrow against the equity in their homes. But while HELOCs offer flexibility and relatively low interest rates for homeowners, they're also becoming a lucrative target for thieves. The reason? A HELOC can offer hundreds of thousands of dollars, borrowed against the equity that homeowners have accumulated in their property. And they have considerable stakes to draw from these days: In fact, according to a recent Intercontinental Exchange (ICE) 'Mortgage Monitor Report,' the average mortgage-holding homeowner currently has about $203,000 worth of tappable home equity. The size of HELOC credit lines and balances has grown steadily over the past year, too. With the rise of mobile banking and online document storage, the risk of HELOC malfeasance has also increased. But by understanding how it happens, and the precautions you should be taking, you'll be one step ahead of the game in protecting your home from one of the newest trends in financial fraud. HELOC fraud occurs when someone gains access to a homeowner's line of credit, either by stealing funds from an existing HELOC or by impersonating the homeowner to open a new HELOC. 'Identity theft is one way we have seen HELOC fraud committed, where a person obtains information about a homeowner through nefarious means, and then forges documents to obtain a loan in the homeowner's name,' says Rose Krieger, senior home loan specialist at Churchill Mortgage. Unlike other forms of identity theft, someone stealing from your HELOC can easily fly under the radar, because of the nature in which the money is typically borrowed: slowly over many weeks or months, rather than all at once. People often make only occasional draws from their HELOC, so they don't monitor the account frequently. Since draws also tend to be sizable, it's unlikely that a lender would flag an unusually large one, as it might do with a credit card. And since HELOC interest rates regularly fluctuate, an increase in a minimum monthly payment (caused by the fraudster's draw) might not seem out of the ordinary. In other cases, scammers may use forged documents or stolen info to open a HELOC in someone's name, cash out quickly, and disappear before either the lender or borrower realizes what's happened. It's unfortunate, but many details about a home, the homeowner and liens on a home (like a mortgage or home equity loan) are a matter of public record. HELOC fraud can take several forms. The most common methods include: 1. Account takeover fraud: Someone gains access to a homeowner's existing HELOC account through phishing e-mails or texts, data breaches, or stolen credentials (like your HELOC checks or debit cards). Once inside, they can transfer funds, change contact info, or request checks and wire transfers, all without the homeowner's knowledge. 2. Synthetic identity fraud: Scammers can use a combination of real and fake information to create a new identity and apply for a HELOC in a homeowner's name. This often involves using stolen Social Security numbers and fabricated documents to trick lenders. Last fall, several people in Orange County, Calif. were arrested and charged with stealing homeowners' identities to obtain over $500,000 in HELOC funds – money secured by the identity-theft victims' actual homes. 3. Title fraud: In more rare and sophisticated cases, a scammer may forge documents to transfer the title of your home into their name, then take out a HELOC as if they were the owner (which, on paper, they now are). While less common, this type of fraud can be more difficult to resolve. 4. Counterfeit HELOC checks: Another growing trend involves scammers creating fake checks tied to legitimate HELOC accounts. They do this by using information available in public records – like the homeowner's name, address, HELOC lender and HELOC account number – to forge convincing-looking checks, which they then use to draw on the line of credit. HELOC fraud can be difficult to detect, but there are some red flags homeowners should watch for. If you notice any of the following, it could be a sign someone has hacked your existing HELOC and is attempting to withdraw funds, or has tried to open one in your name: Unrecognized draws or transactions on your HELOC account Statements or notifications you don't recognize Missing statements or sudden changes to contact preferences (including mailing or email address) A sudden drop in your credit score A sudden increase in your outstanding HELOC balance/monthly minimum payment Lender notices regarding a HELOC account you didn't open If you believe that your existing HELOC has been compromised or that a HELOC has been opened in your name, acting quickly is your best line of defense. Here's what to do: 1. Contact your lender immediatelyNotify your bank or HELOC lender as soon as you notice suspicious activity. Review the activity with them and ask to have your account frozen or suspended to prevent further withdrawals. 2. File a police reportReport the fraud to your local police department. A police report can help support your case when dealing with the lender, credit bureaus or county clerk offices later on. 3. Report identity theft to the FTCGo to to file a complaint with the Federal Trade Commission. The FTC provides a recovery plan and documentation to help you dispute any fraudulent accounts created in your name. 4. Contact credit bureausNotify all three credit bureaus and place a fraud alert or credit freeze on your accounts. This will help prevent any additional fraudulent accounts from being opened in your name. 5. Check your property titleIf you suspect title fraud or deed theft, check your county recorder's office to verify the property title is still in your name. If it's been changed, you may need to involve a real estate attorney to resolve the issue. 6. Work with your lenderDepending on the nature of the fraud and how quickly it was reported, your lender may be able to recover some or all of your stolen funds. You should be prepared to provide documentation like a police report to support your claim. One bit of good news: You're not on the hook to repay the missing money, or any interest on it. As open-ended lines of credit, HELOCs are covered by the Fair Credit Billing Act of 1974 (part of the Truth in Lending Act), which limits your liability for fraudulent charges. But you must report them promptly. First of all, keep in a safe place any account-related paperwork and borrowing tools, like checks or cards (some lenders, like PNC, issue both). These tools make it more convenient for you to access your HELOC funds, but unfortunately make it easier for fraudsters, too. In addition to monitoring your account and using tools like credit freezes and two-factor authentication, it's essential to be cautious about unsolicited communication. Scammers often impersonate lenders by sending emails, texts, or even initiating phone calls that seem legitimate. 'To protect yourself, it's important to regularly check your credit report to ensure all debts are accurate,' says Krieger. 'Be mindful of calls and text messages claiming to be [from] your financial institution — remember that your financial institution will never call you and ask for your full Social Security number, account number or codes sent to your phone.' These messages may claim there's an issue with your HELOC account or ask you to verify personal information using a link or a passcode. If you receive an unexpected request (even one that looks like it's from your bank), don't respond right away – directly to that message, at least. 'When in doubt, hang up and call your financial institution, or go in personally,' Krieger advises. Also, check your account on the lender's website or its app yourself; if a message is legitimate, it may appear when you log in. HELOC fraud is a real and growing concern. While there are legal safeguards and lenders have security measures in place, protecting yyour home equity and HELOC funds in today's day and age ultimately starts with you. It requires a healthy dose of vigilance — and skepticism. Keep in mind that lenders will never ask you to confirm your identity by clicking a link in a text or providing personal information via an unsecured channel. By monitoring your account and statements, keeping checks and cards secure, and staying alert, you can reduce your risk and keep your home equity funds safe. And if fraud does happen, acting quickly can help you limit the damage and ensure you're able to fully recover your account and any stolen funds.
Yahoo
27-05-2025
- Business
- Yahoo
How to use a HELOC to pay off debt (and when it makes sense)
Are you overwhelmed by credit cards, personal loans, or medical bills? Depending on your financial situation, using a home equity line of credit (HELOC) to pay off debt could be a smart move. However, it's crucial to understand how paying off or consolidating debt with a HELOC works to decide if it makes sense for you. A HELOC is a line of credit drawn from the equity in your home. It functions like a credit card with a revolving line of credit, unlike a traditional mortgage or personal loan, which gives you a lump sum of money. A HELOC gives you access to money for just about anything, such as large purchases, home improvements, or debt consolidation. Most HELOCs have variable interest rates, although some lenders offer fixed-rate HELOC options. HELOC annual percentage rates (APRs) are typically much lower than credit card rates. So, while they have some of the same features as a credit card, they can be more affordable and actually help you pay off credit card debt. This embedded content is not available in your region. To pay off debt with a HELOC, you need to understand how to qualify and what rules you have to follow. Here are the basics on getting a HELOC and using the funds to pay off other debts. HELOC lenders typically look for homeowners with 15% to 20% equity in their house. Equity is your home's value minus your outstanding mortgage balance. That means you're more likely to get approved if your mortgage balance is 80% to 85% less than your home's appraised value. For example, if an appraiser claims your home is worth $400,000, your outstanding mortgage principal should be a maximum of $320,000 to $340,000. If your balance is higher, you won't qualify for a HELOC. You'll also need to meet basic borrower requirements, such as having a good credit score, a low debt-to-income ratio, stable income, and a history of on-time payments. There are two main phases of a HELOC. The draw period: You can access as much or as little of the line of credit the lender approved you for during the draw period, which usually lasts up to 10 years. During this time, you're typically required to make minimum interest-only payments on the amount you withdraw (though you can pay more). During this period, you can draw money as needed to pay off medical debt, credit card bills, or other significant debt payments. The repayment period: In the repayment period, your minimum payment will increase to cover both interest and principal until you've paid off the balance. The repayment period usually lasts for 20 years, and you can no longer draw money during this time. HELOCs are secured loans that use your home as collateral. Secured loans are considered less risky for lenders because if a borrower can't repay the debt, the lender can seize the home. Secured loans can be riskier for borrowers, though. If you struggle to afford monthly payments on both your HELOC and original mortgage, your home could go into foreclosure. So, while a HELOC can help you get out of debt, only consider this option if you're confident you can keep up with the loan payments. You don't want to lose your house in an attempt to pay off unsecured debt, such as a credit card or personal loan. There are several benefits to a HELOC, especially if you're dealing with high-interest debt. Here are a few pros to consider. Lower interest rates: HELOC interest rates can be lower than those for credit cards or other unsecured loans, like personal loans. Using a lower-interest line of credit to pay off higher-interest debt will save you money on interest payments. Affordable payments: For the first decade or so, you can typically make interest-only payments on your HELOC. This can be more affordable than the minimum payments for other borrowing methods. May improve credit utilization: Credit utilization refers to the percentage of your available credit you're using. The lower your utilization ratio, the better. For example, it's better for your credit score if you owe $1,000 on your credit card with a $10,000 limit than if you owe $9,000. The FICO credit score model doesn't usually include HELOCs when calculating credit utilization. (However, other scoring models might.) Streamlined payments: Simplifying from multiple credit card payments to one HELOC payment could make it easier to manage your finances. Before using a HELOC to pay off other loans, consider these potential downsides. Requires enough home equity: You may have a hard time qualifying for a HELOC if you don't have at least 15% equity in your home. May come with closing costs: If the lender charges closing costs, you could pay 2% to 5% of the credit limit. Variable interest rates: Repaying a variable-rate HELOC can be difficult to budget since the payment can change periodically. Defaulting can risk home foreclosure: Your home is collateral with a HELOC, so if you have trouble repaying, the lender can repossess your home. There can be consequences for not repaying your credit card, personal loan, or student loan bills, but because these are types of unsecured debt, companies cannot take away things like your home. Lower interest rates are one of the biggest advantages of a HELOC, making it a solid option for people with high-interest debt. 'Anytime you can consolidate debt by rolling into a loan with a lower interest rate, it can put you in a better financial position,' said Dre Torres, loan officer at Cornerstone First Mortgage, via email. 'Savings from a HELOC can help you have a positive monthly cash flow or pay down other debts.' However, struggling to repay a HELOC has serious consequences. 'A HELOC is tied to your home, so it's not something you want to take lightly. Make sure you are financially diligent and don't get back into debt,' noted Torres. 'If you lack a solid budget or have poor spending habits, a HELOC is generally a bad idea. There are other ways to consolidate debt if a HELOC is not right for you. Home equity loan: Access your home's equity in a lump sum, typically repaid at a fixed interest rate. Cash-out refinance: Refinance for more than your existing mortgage if you have enough equity. Take the difference in cash and use it to pay off debt. Personal loan: You can borrow a lump sum to consolidate or pay off higher-interest debt and repay it at a fixed rate, usually within five to seven years. Credit card balance transfer: Transferring high-interest debt to a credit card with 0% APR could save you money if you can pay off the balance before the no-interest period ends. You typically need good to excellent credit to qualify. Credit counseling programs: Some nonprofit agencies can help you negotiate more affordable payments with your creditors if you're struggling to stay current. Using a HELOC to pay off debt can be a good idea if you have high-interest credit card debt. HELOCs tend to have lower rates than credit cards because they're secured by your home. But that also means you could lose your home if you struggle to repay the balance. A HELOC typically shows up on your credit report as revolving credit. As with other credit accounts, missing payments can hurt your score. A HELOC can also impact your credit utilization. While FICO doesn't include a HELOC in your utilization calculation, other credit score models might. You can use a HELOC or home equity loan to pay off high-interest debt. Both use your home as collateral. HELOCs usually come with variable interest rates. Home equity loans have fixed rates, making them more predictable. Your HELOC payments could be more affordable if you choose interest-only payments during the draw period. However, your payments will increase significantly when the draw period ends. Read more: HELOC vs. home equity loan — Choose the right one for you Laura Grace Tarpley edited this article.
Yahoo
21-05-2025
- Business
- Yahoo
Do you need an appraisal for a HELOC or home equity loan?
Whether you're eyeing a home renovation, consolidating debt, or starting a business, borrowing against your home equity can be a viable option. But before you get ready to cash in, there is one step you will likely need to take: getting your home appraised. In this guide, we will dive into whether you need an appraisal when applying for a home equity loan or HELOC, how the process works, the types of appraisals and how much they cost. The short answer is typically yes. Before lenders approve you for a HELOC or home equity loan, they usually require an appraisal, which is an assessment of your home's worth – what it would fetch if sold on the current housing market. By determining your home's value, the appraisal will help determine the amount of equity you have, and the amount the lender will allow you to borrow against. Typically, you won't be able to access all your available equity, as most lenders cap that amount at 80 to 85 percent of your ownership stake. Keep in mind: Your home equity stake basically equals your home's current value, minus your outstanding mortgage. Home appraisals confirm a property's current market value. Everything about the process of getting HELOCs and home equity loans stems from that value. You may recall that, when you bought your home, your mortgage lender ordered an appraisal to determine what the property was worth, and how big a sum you could borrow for it. The aim here is similar. 'Home equity products are secured against the borrower's home and lenders want to ensure sufficient equity even in the case of home price fluctuations,' says Shoji Ueki, chief growth officer at Point, a home equity investment firm based in California. 'If the market changes or something unexpected happens, we want to be sure the value of the home still supports the investment amount. It helps us manage risk and ensures the borrower isn't overleveraging their home.' A home's valuation is also a 'key driver in the pricing' of the loan, explains Kiran Kuar, head of credit at Figure, a North Carolina-based HELOC lender. Lenders look at your loan-to-value ratio (LTV), which is the amount of money you're borrowing divided by the value of your property. If that percentage is higher than the lender's LTV threshold, they may reduce your loan amount, or even deny your application altogether. If your LTV is in the acceptable range, but close to the max, they may approve the loan, but with a higher interest rate. Despite its importance, a new appraisal for a HELOC or home equity loan is not an absolute requirement in all cases. If you happen to have gotten a full home appraisal shortly before starting your HELOC application – while applying for another loan, say – your lender might accept it. 'If a prior appraisal is available and meets current investor guidelines, it may be reused,' says Vishal Garg, CEO of Better, a HELOC lender headquartered in New York. Generally, that appraisal should be relatively recent, no more than six months old (since the whole point is to determine the home's current market value). Increasingly, home equity lenders are also waiving the traditional in-person appraisal for an automated valuation model (AVM). An AVM is a computer-based algorithm that uses publicly available data to estimate a home's value, without human input. Obviously less time-consuming and costly, AVMs are often used for borrowers with strong credit scores (in the mid-700s to 800s) looking for a small loan relative to the value of their home or to the amount of their equity (since they've paid off a significant portion of their existing mortgage). No humans needed Over 75 percent of HELOC and home equity loan originations now are subject to an automated valuation model (AVM) or desktop valuation (DV) method, with the majority of both categories entailing only an exterior/drive-by or no inspection at all. AVMs were utilized on 43% of home-equity loan originations. The AVM 'is a very frictionless, zero-time method to value someone's home,' says Kuar. 'The borrower does not have to wait. It's instant. You can present a decision fairly quickly to the consumer.' Kuar acknowledges that AVMs may be limited by the data they have, though. They 'assume that the house is in average condition and in a similar condition to other properties in the immediate neighborhood,' she says. That means it won't capture any extensive value-enhancing upgrades or renovations you've made to your property (of course, it won't indicate if the place is in disrepair, either). Once you apply for your home equity loan or HELOC, your lender will let you know if an appraisal is required and what type will be used. Here's a snapshot of the different types of appraisals that may be used, what they entail and other criteria: Appraisal type Description Data sources Time to complete Cost Full appraisal Most comprehensive; includes physical inspection of interior and exterior Site visit, recent comparable sales, multiple listing service (MLS) data, market data, public records 30 minutes–several hours for inspection; 1–3 weeks total $300 or more (depends on size of home) Automated valuation model (AVM) Computer-generated estimate using statistical models and public data Public records, recent comparable sales, market data A few minutes or less $10-25 Desktop valuation /appraisal (DV) Professional appraisers make valuations based solely on data, without any physical inspection MLS data, public records, recent comps, photographs 1–3 days $75-$200 Hybrid appraisal Combines a field inspection with a desktop valuation by an appraiser Site visit, recent comps, market data 30–60 minutes for inspection; 2-7 days for analysis $150-$300 Broker price opinion (BPO) Opinion of a broker or real estate agent about the value of home Recent comparable sales, market data 1 day or more $50-$300 Drive-by appraisal Appraiser views the property from the street; no interior inspection Exterior observation, MLS data, public records, recent comps, photographs 15–30 minutes; report within a few days $100-$150 Learn more: Home appraisal vs. home inspection: What is the difference? No-appraisal HELOCs You've probably seen some lenders advertising no-appraisal HELOCs, which are somewhat of a misnomer. With these loans, a professional won't be scouring through every nook and cranny of your home as with a traditional appraisal. However, the lender may use alternative methods to value your home, like AVMs, desktop valuations or drive-by appraisals. The appraisal process for a HELOC or home equity loan varies depending on the lender, but the purpose is the same: to determine the market of your home. Here's a step-by-step run-through of the process from beginning to end. Begin the HELOC or home equity loan application by providing details about your income, debts, property and financial history. After the loan application is submitted, the lender will evaluate your financial profile, including your credit score and existing mortgage balance. If you meet the initial criteria, the lender orders an appraisal to determine your home's market value. The type of appraisal (full, drive-by, desktop, or AVM) depends on the lender's policies and loan amount. If an appraisal fee applies, the borrower usually pays for it, while the lender chooses who performs it. If an in-person appraisal is required, you will need to schedule a time for the appraiser to visit your home. The findings of the appraisal are compiled in a report, including the estimated value of the property and supporting documentation such as recent comps and then submitted to the lender. The lender uses the appraisal to calculate your home equity and determine how much they're willing to lend. How quickly you receive a decision will vary depending on the lender and the type of appraisal conducted. Based on the appraisal and your financial profile, the lender finalizes their offer. The findings of the appraisal may impact your loan terms or approval. You may also be asked for more documentation or offered a reduced loan amount. After you see the results of your appraisal, don't be surprised if the value of your home is vastly different from the estimate given by a real estate listings site or calculator 'That number published online is a very rough estimate,' says Jennifer Wentworth, owner and certified residential appraiser at MLS Appraising, an appraisal company based in Denver. 'The actual value can vary quite a lot from that. It can be less and it can be more, but it doesn't mean that it's a bad appraisal or that there's a problem with the appraisal. It's just what happens when 'we're actually looking at the specifics for a home in the actual market.' Can you get a home equity loan or HELOC without an appraisal? You might be able to get a home equity loan or HELOC without a full appraisal, if your lender uses an automated valuation model, a desktop valuation or a drive-by appraisal to value your home (or some sort of combination). However, lenders require some way to confirm your home's current market value before approving your loan. How should you prepare for a home equity appraisal? If your lender ordered an in-person appraisal, make sure your home is clean and well-maintained. Complete any minor repairs and gather information on recent improvements or upgrades you've made. It also helps to know the sale prices of similar homes in your neighborhood to give the appraiser some context. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
