Cash-out refinancing had its 15 minutes of fame last year. Now its time for home equity to take the spotlight.
The main reason cash-out refis are not as popular is because current mortgage rates are well past 6% — meaning if you currently have an interest rate lower than 6%, you would take on a higher mortgage rate on a larger loan.
For homeowners in need of a lump sum of cash, home equity loans or HELOCs are the better move right now. HELOCs can offer relatively low rates and additional flexibility that many homeowners love. Because of this, they’re a good option for those who are seeking low-cost financing secured by their house, says Vikram Gupta, executive vice president and head of home equity at PNC Bank.
The process to apply for and get approved for a HELOC can take a few weeks to a few months, but if you have sufficient equity in your home and good credit, it may be easier than you think. And while how much home equity you’ve built up will limit whether you can get a HELOC and how much you can borrow, there’s no strict time limit regarding how soon you can open a HELOC after you’ve closed on your new mortgage — so long as you’re prepared for the debt.
Be sure to compare quotes from multiple lenders to get the best HELOC rate.
Here’s what to know about how long it takes to get a HELOC, and how to decide if you should get one.
How Soon Can You Get a HELOC After Buying Your Home?
If you’re looking to get a HELOC on your new house, you might not have to wait as long as you think.
“You can take out a home equity line of credit at the same time you take out your mortgage,” says Gupta. It’s called a “piggyback loan,” and can help extend your borrowing capacity. For example, a bank might be willing to lend up to 80% of the value of your home on a mortgage, and then lend another 10% in value at the same time in the form of a HELOC.
More commonly, borrowers look at HELOCs after they’ve already taken out their primary mortgage. But as long as you have the equity, you can get started.
“It could be immediately, day one, or it can be 45 years later,” Gupta says. “There’s no limitations as to when [the borrowers] can start the process.”
But the equity question is an important one: There are limits to how much of your home equity lenders are willing to let you take out. For example, if your mortgage amounts to 90% of your home value (known as a loan-to-value ratio), it’s likely too early to start considering a HELOC. You would need to wait until you pay down the mortgage and have at least 20% equity in the home.
Like any loan, how soon you can get a HELOC also depends on your financial profile. Borrowers with better credit scores and less debt overall might be eligible for a HELOC sooner than others.
Even if you do have lots of home equity right after you close on your home — for example, if you had a large down payment — it might still make sense to wait a bit before taking out a HELOC. For one thing, you’ll want to get used to making your mortgage payments before adding on another monthly cost. And in general, the less debt you have, the better, so it’s not always advisable to take out two large loans around the same time.
Factors That Affect Time to Get a HELOC
Once you’ve decided to pursue a HELOC, there are a few variables that will affect how quickly your loan is processed.
Here’s what that timeline depends on:
Your loan-to-value ratio
If your mortgage only amounts to 50% of the value of your home, and you’re seeking a HELOC for another 10%, a lender would likely see that as a low-risk loan, because there’s still plenty of equity leftover. If, however, you’re trying to borrow up to 80 or 90% of your home value, a lender will order a home appraisal to confirm your home value, which can add weeks to the process.
When it comes to securing a loan of any type, lenders like to see strong applicants with a good credit score and ample income. If a bank can quickly assess that you are a strong applicant, the process is likely to move along faster.
“If it’s low-risk to the bank, they’re trying to streamline the process,” Gupta says. Sometimes, well-qualified applicants can find the loan process taking less than 30 days.
If you have a lower credit score, or if you have a complicated financial situation that involves lots of documentation, that could slow down the approval.
Is Getting a HELOC Worth It?
There are certainly advantages to getting a HELOC, but you should also be aware of the drawbacks.
“The pro, definitely, is basically no cost and the timeliness to get the loan,” says Devin Pope, partner and senior wealth advisor at Albion Financial Group, referring to the fact that there are often (but not always) no upfront fees or closing costs associated with securing a HELOC.
Another advantage, Pope says, is the flexible payment schedule, which allows you to pay “interest only” on a HELOC for a certain period of time if you so choose. And many borrowers like that a HELOC functions much like a credit card, where you can tap into a revolving line of credit at will and only pay back the amount that you spend during the draw period.
But there are downsides: Pope points out that HELOCs often have variable interest rates, meaning that your interest rate — and by extension, monthly payment — could change unexpectedly in the future.
In addition, says Pope, the flexibility offered by a HELOC can often lead borrowers to misuse the funds or overextend themselves. “Debt can be a powerful tool, but it can also be abused,” he warns.
So, how do you decide if a HELOC is right for you? Gupta recommends that borrowers ask themselves a simple question when they’re looking to borrow money: “How quickly do you want it, and how long are you willing to wait? Because the quicker you want it, the more expensive it’s going to be,” he says.
A credit card, for example, is available immediately, but has the highest interest rates. Whereas a HELOC that takes weeks or months to get approved has some of the lowest interest rates.
If you’re willing to wait, HELOCs are a good choice to fund renovations or other investments in your home. Many borrowers opt for HELOCs because the money is “there if they need it,” but if they don’t use it, they don’t owe anything back. But Pope cautions against using HELOCs for nonessential purchases (like a luxury car or boat), or to support daily living expenses.
Right now, the trend of rising interest rates also complicates the decision to get a HELOC. The market is moving away from a period of historically low rates, and the coming years are likely to see rates rise consistently. Because HELOCs have variable interest rates, Pope says you need to be prepared for the possibility that the cost of borrowing money through a HELOC will go up over the next few years. But Gupta also points out that some lenders offer HELOCS where you can lock in rates on parts of the loan (similar to a fixed-rate home equity loan), allowing you to buffer against future rate hikes.
HELOC Rates Are on the Rise
The highest inflation in 40 years has yet to wane. The Consumer Price Index showed prices up 8.2% year-over-year in September, barely an improvement from August’s 8.3%.
That has implications for the Federal Reserve’s efforts to bring price growth down, but it also means a lot for consumers, especially those looking to borrow money. The Fed will likely continue to raise its benchmark interest rate – the federal funds rate – in its ongoing bid to stem demand and lower inflation. But that rate affects the cost to borrow money across the economy, particularly home equity lines of credit or HELOCs.
HELOCs often have variable interest rates that are directly tied to an index – the prime rate – that moves in lockstep with the federal funds rate. When the Fed raises rates, it means HELOC borrowers pay more.
Home equity loans with fixed rates aren’t as directly affected, but those rates are set based on the lender’s cost of funds, which also rises as rates go up.
The economic situation means home equity rates are likely nowhere near done rising, experts say. “I don’t expect [rates] to rise at the rate they have been over the last nine to 12 months. But I think they will go up,” Kevin Williams, a CFP and founder of Full Life Financial Planning, told us. “I’m hopeful that they’ll slow down, but we’ve seen a lot of up and down so it seems like there’s still room for them to rise.”
Alternatives to Getting a HELOC
Home equity loan
A home equity loan is very similar to a HELOC, in that it’s a tool that leverages the equity in your home. But instead of being a flexible line of credit, a home equity loan comes in a lump sum of cash. This can be a better option than a HELOC if you need all of the funding upfront — say, for a large home renovation, or to consolidate other debts. Home equity loans also have the benefit of being a fixed-rate loan instead of a variable-rate one, but the tradeoff is that they typically have a higher starting interest rate than a HELOC.
Cash-out refinancing is a process where you can refinance your primary mortgage to create a larger loan, allowing you to extract the difference between your original mortgage and your new, larger mortgage in cash. This is also a good option if you need a lump sum of money all at once, and has the advantage of being a fixed interest rate, compared to a variable rate HELOC. But if you’ve recently locked in or refinanced a low-interest rate mortgage, you might not want to refinance it and lose your rate; that’s a scenario where Gupta recommends opting for a HELOC instead.
Unsecured personal loans are a form of lending that can be used for virtually any purpose, and their flexibility is a big perk. But because they’re not secured by your home equity like a HELOC is, lenders see them as a higher risk, and the interest rates are usually higher. However, they can be quicker to get than a HELOC, with some lenders offering same-day loan approval and funding. Personal loans can be a tool for quick financing in small amounts, especially if you can pay it back quickly and avoid accruing lots of interest.
0% APR credit card (for debt consolidation)
If you’re planning to use a HELOC to consolidate other forms of high-interest debt, like credit card debt, a 0% APR or balance transfer credit card can be a good alternative. This strategy requires some careful planning and discipline, as you want to make sure you pay off the balance before the 0% APR introductory period ends and a steep interest rate kicks in. If you do it right, however, you won’t have to pay any interest at all. And, if you have good credit, securing a 0% APR card is much quicker and easier than securing a home equity loan.