Home Equity Borrowing

If you want (or need) a little extra money to pay for existing needs, or to serve as an “emergency fund” in case unexpected expenses come up, and you’re unsure about committing to a personal loan, your house may be the answer for you.

The two most common ways to utilize the equity in your home are home equity loans and home equity lines of credit. Though the two sound similar, they’re quite different: 

• A home equity loan (HELOAN) converts your home’s equity into a fixed sum of cash received in a one-time payout. You pay back a home equity loan by making fixed monthly payments over a defined time period. A home equity loan is sometimes called a “Second Mortgage” because of the similarities to a first mortgage.
• A home equity line of credit (HELOC) is more like a credit card. A percentage of your home’s equity is available to you for a period of time (typically ten years) as funds you can access when – and if – you need them. You don’t have to withdraw the entire amount available to you, and you repay the funds you do use over time.

Before you start the application process, you should decide which financial institution you want to use, which also involves deciding on the loan options that will work best for you. Things to consider:

• Are there upfront fees or closing costs?
• Does the lender offer a promotional interest rate, and if so, how long does it last and what will the rate be afterwards?
• What are the repayment terms?
• Is the interest rate fixed or adjustable, and if it’s adjustable, what will cause the rate to change? What’s the maximum interest rate you could be charged?

Though your lender isn’t entirely in control, they should be able to give you a rough estimate of how long it will take you to receive your funds. Equity loans typically take from two – four weeks to process, which includes the time it takes to complete the application and provide required documentation, conduct a credit check, and perhaps wait for an appraisal or additional information.

Before applying for any loan, we recommend checking your credit to ensure the information is correct and to give you time to address any potential issues. (Using annualcreditreport.com won’t ding your credit score.) If you’ve placed a “freeze” on your credit, you’ll want to remove it.

Gather Your Documentation

You will need to provide various documents to apply for an equity loan, including:

• Identification and proof of home ownership (your mortgage information)
• Proof of income like pay stubs, W-2s, 1099s, tax returns, or estimated quarterly tax statements
• Property information like your home’s purchase price and the date your home was built
• Current home information like insurance coverage, homeowners' association or condominium dues, or existing liens
• Deposit account numbers and balances, bank statements

After choosing your lender, checking your credit, and gathering the documents you’re likely to need, you’re ready to apply. Many lenders will allow you to apply online, while others will require you to complete a paper application. Meeting with the lender can be useful as they’re able to discuss the process and let you know what to expect.

After applying, your lender should keep you informed as to where you are in the lending process. For example: has your title been ordered and approved; has your appraisal been scheduled; has your credit report been received? If there are any issues, your lender should contact you right away and let you know what needs to be done to resolve them.

Your lender will also let you know how to prepare for your closing, which can include:

• Scheduling an in-person closing for you to sign documents and either receive your funds or receive the information you’ll need to access your funds (more on this later)
• Receiving portal information where you can sign documents electronically
• Receiving “hybrid” information where you’ll electronically sign most of your documents and meet with a notary to finalize the process

If you’ve applied for a home equity loan, you’ll receive your funds (normally they’ll be electronically transferred into your deposit account) and repayment information.

If you’ve applied for a home equity line of credit, you will receive information about how to access your funds – normally using a paper check, electronic transfer, or bank withdrawals – and your repayment terms if and when you access the money in your account.

The good thing, especially about a HELOC, is that you have financial flexibility. You can use the funds to help you manage your current debt, invest in home improvements, cover unexpected costs, or enjoy the peace of mind of knowing you have money on-hand if you need it.

If an equity loan doesn’t suit your needs, there are alternatives like:

• Cash-Out Refinance – where you replace your current mortgage with a longer loan and receive the difference in cash
• Personal Loans/Credit Cards – secured or unsecured loans can be used for various purposes
• Deposit Account Loans – if you have money invested, say in a Certificate of Deposit (CD), you might be able to use those funds to secure a personal loan

Understanding the lending process and carefully considering your options can help you make an informed decision about using your home’s equity. If you have any questions or need assistance, feel free to reach out to a CSB Banker.

The views, information, or opinions expressed in this article are solely those of the author and do not necessarily represent the views of Citizens State Bank and its affiliates, and Citizens State Bank is not responsible for and does not verify the accuracy of any information contained in this article or items hyperlinked within. This is for informational purposes and is no way intended to provide legal advice.