If you have enough equity in your home, this can be a low-cost way to pay for a major expense.
Home equity loans are one way you can pull cash from your home. Here’s how the loans work, how to shop for one—and the risks of using one.Home equity is the difference between the value of your home and the amount you owe on your mortgage. Typically your equity will go up each time you make a payment. If home values rise, you’ll get an extra boost. Picture an old-fashioned scale—when you first buy a home, you probably have more debt than equity, so the scale is lopsided toward debt.
If you want an estimate of how much your house is worth before applying for a home equity loan, use free online tools from real estate marketplaces like Zillow or Redfin, or check if your primary mortgage lender can help. “Some lenders actually have these systems available to consumers early on in the process,” Heck says. “And they may not charge for it.”
You usually need to have a good to excellent credit score and a low debt-to-income ratio to qualify for the maximum loan and the lowest possible interest rate.on home equity loans in September 2022 were between 6.39% and 8.07%, while the average rate for fixed-rate, 30-year first mortgage was just under 6%.
Deciding which type is best for you often comes down to matching repayments with cash flow, Alexander says. If you have consistent income, a home equity loan is often a better choice, since payments are fixed. If you have inconsistent income, say you work on commissions, for example, then the repayment flexibility of a HELOC looks more attractive, he says.
But since the pandemic transformed the housing market, Heck says, “we’re in one of the first sort of rate and home-price environments where these products actually might be the best option for consumers” who want to access credit at a relatively low cost.
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