A homeowner’s guide to home equity loans

This article is for educational purposes only. JPMorgan Chase Bank N.A. does not offer Home Equity Loans nor Home Equity Lines of Credit (HELOC) at this time. Please visit our HELOC page for future updates. Any information described in this article may vary by lender.

A home equity loan can be a potentially valuable tool for homeowners looking to tap into the value they’ve built in their property. Essentially, a home equity loan allows you to borrow against the equity in your home, sometimes at a lower interest rate than you might otherwise qualify for. There are, however, some factors to keep in mind when taking out a home equity loan.

What is a home equity loan?

A home equity loan is a type of loan that lets homeowners use the equity of their home as collateral. If you’ve paid off a significant portion of your mortgage, you may be eligible to borrow against that equity using a home equity loan. This can be especially valuable to homeowners looking for financing but comes with a critical caveat: failing to repay the loan can mean losing the value you’ve built in your home.

How does a home equity loan work?

Before borrowing against your home, it might be wise to understand the home equity loan process and how these loans work. Here’s a step-by-step breakdown of the mechanics of home equity loans:

Home equity loan requirements

Home equity loans, like other financing options, come with certain requirements. Lenders will typically look for:

• Adequate home equity: Lenders typically prefer homeowners who have built up a significant amount of equity in their home already. Lower equity means less to borrow against, too.

• Stable income: As with any loan, lenders want to see consistent income that suggests you’ll be able to repay the loan.

• Good credit history: While not always mandatory, a good credit history can be beneficial.

• Low debt-to-income (DTI) ratio: A lower debt load compared to your income indicates to lenders you could effectively handle new debt.

How to get a home equity loan

While the specifics vary by situation, the process generally follows a few key steps:

• Picking a lender: Shopping around and comparing a variety of lenders can help you identify the one best suited for your needs and financial situation.

• Applying: Once you’ve chosen a lender, the next step is to submit your loan application. You will be asked for certain financial documents, details about your home and other relevant information.

• Appraisal: In some cases, lenders may require an appraisal to determine the current market value of your home.

• Approval and terms: If approved, you’ll be presented with loan terms, home equity loan rates and other important details. It’s then up to you to accept these terms.

How much home equity loan can I get?

The amount you can borrow through a home equity loan largely depends on the equity you’ve built in your home, among other factors. Lenders typically have their own criteria for determining this; consult with yours for specifics regarding how much you could expect.

What you can use your home equity loan for?

Home equity loans can be used in various ways. Homeowners commonly use funds for:

• Home improvements

• Debt consolidation

• Major expenses like tuition, medical bills or significant life events

Pros and cons of a home equity loan

Home equity loans, like other financial products, come with their own set of potential advantages and disadvantages. Let’s look at what some of these might be to help you make a more informed decision:

Advantages of a home equity loan

• Fixed interest rates: Home equity loans typically come with fixed interest rates, meaning consistent monthly payments throughout the loan term.

• Flexible use: The funds from a home equity loan can generally be used for various purposes.

• Potential tax deductions: In some circumstances, the interest paid on a home equity loan may be tax-deductible. Speaking with your lender and a qualified tax professional can provide clarity as to whether this may be the case for your prospective home equity loan.

• Lump sum disbursement: Homeowners generally receive the loan amount all at once.

Home equity loan disadvantages

• Your home is collateral: Since the loan is secured by the home itself, there’s the potential risk of foreclosure if the loan isn’t repaid as agreed.

• Additional debt: Taking out a home equity loan means more debt, requiring additional financial management.

• Closing costs: As with an initial mortgage, a home equity loan may come with closing costs and other fees.

• Reduced equity: Borrowing against it reduces the total amount of equity you have in your home.

Home equity loan vs. cash-out refinance

There are a few ways for homeowners to tap into the equity they’ve built in their property. Two common ways are the home equity loan and a cash-out refinance. As we’ve discussed, a home equity loan lets you borrow against the equity you’ve built in your home, resulting in an additional loan alongside your primary mortgage. A cash-out refinance, on the other hand, involves replacing the existing mortgage with a new one, where the new loan’s value exceeds the current mortgage balance. The difference is then provided to you in cash.

Both methods offer a way to use your home equity, but the approach to accessing and repaying the funds varies. Speaking with your lender and consulting with a qualified financial advisor can provide more tailored guidance based on your specific situation.

In summary

A home equity loan lets you borrow against the equity you’ve built in your home, possibly with more favorable terms than a more traditional loan. It’s important, however, to keep in mind that you are borrowing against the equity you’ve built in your home and that failure to repay your home equity loan may have implications for your homeownership. Speak with a qualified home lending professional to learn more about how a home equity loan might prove valuable to you.

Home equity loan FAQs

1. Is a home equity loan a second mortgage?

Yes, a home equity loan is sometimes referred to as a second mortgage. This is because it allows homeowners to borrow against the equity in their homes, similar to how a primary mortgage functions.

2. Can I get a home equity loan with bad credit?

It is possible to get a home equity loan with bad credit but may be more challenging. Lenders typically assess your creditworthiness before approving home equity loans. A higher credit score might lead to better loan terms and interest rates. Other factors, such as the amount of equity you have in your home and overall financial situation, can also influence a lender’s decision. Speak with a home lending professional to better understand your options.

3. Are home equity loans a good idea?

Whether a home equity loan is a good idea largely depends on your personal goals and unique financial circumstances. A home equity loan can potentially offer a lower interest rate compared to other types of loans and can be used for various purposes. However, since your home serves as collateral, there’s additional risks to consider if you were to default on the loan.

4. Do you need an appraisal for a home equity loan?

Yes, most lenders require a home appraisal for a home equity loan to determine the current market value of your home. This helps them measure the amount of equity you have — one of the key factors in the loan amount you might qualify for.

Have questions? Speak to our Home Lending Advisors for details on other products that Chase may offer.