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The Fastest Ways To Cash Out Your Home Equity

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When expensive and unexpected financial situations arise, it can be difficult to quickly get the funds you need. But if you’re a homeowner, you may be able to cash out your home equity for surprise bills.

There are three main options for taking equity out of your home: Cash-out refinance, home equity loan and home equity line of credit (HELOC). Weigh the pros and cons of each option to help you determine whether tapping your equity is the smartest choice for your finances, and which option may be best.

How fast can you close on a cash-out refi?

A cash-out refinance replaces your current mortgage with a new loan — this new loan has a larger balance because it includes a percentage of your house’s equity (your home value minus what you owe). Your lender pays off your existing loan and allows you to cash out your home equity by disbursing the remaining amount to you in a lump sum.

How to qualify

While each lender’s limits vary, you can usually borrow up to 80% of your home’s value. This means you’d need at least 20% equity in your home to qualify. Your lender will also review your credit history and debt-to-income (DTI) ratio.

How long does it take to get the money?

Historically, a cash-out refinance takes around 30 to 45 days to close, though timing can vary with each lender. However, in January 2021, the average time to close on a refinance was 59 days, according to ICE Mortgage Technology’s latest Origination Insight Report.

Still, the home appraisal process can cause slowdowns. To help things run as smoothly as possible, respond promptly to your lender’s documentation requests. Once you close, you can usually expect to receive money in about a week, but the time frame depends on your lender.

What to watch out for

Since you’re borrowing a loan amount that’s bigger than your previous mortgage, you’ll pay more in interest over the life of your loan. You’ll also have to pay for refinance closing costs, which can range from 2% to 6% of your loan amount.

How fast can you close on a HEL?

A home equity loan (HEL) is a lump-sum installment loan based on your home’s equity; it uses the home as collateral and typically has a fixed interest rate. Repayment terms can generally range from five to 30 years, and you repay the loan in fixed monthly installments.

Also known as a second mortgage, a HEL takes priority after your first mortgage. As such, if you go into mortgage default and lose your home to a foreclosure sale, your HEL lender is second in line to be repaid after the lender who gave you the mortgage to buy your home.

How to qualify

To qualify for a HEL, you’ll need at least 15% equity in your home, since most lenders require a maximum 85% loan-to-value (LTV) ratio. Your lender will also consider your DTI ratio and credit history. Minimum credit scores vary by lender: A score of 620 may be a requirement, but in some cases, you could potentially need a minimum score as high as 660 or 680 to get approved.

How long does it take to get the money?

The closing time for a HEL can usually take anywhere from two to four weeks. Once you close, the timing it takes to receive your funds varies by lender.

What to watch out for

You can expect to have a higher interest rate than you’d have for a mortgage refinance, as home equity lenders assume more risk by taking priority after your first mortgage. Home equity loan closing costs typically range from 2% to 5% of your loan amount.

How fast can you close on a HELOC?

A home equity line of credit (HELOC) works like a credit card — a lender gives you a set amount of available credit, and you can use as little or as much of that credit line, up to the limit. You only repay what you borrow, along with interest charges.

A HELOC is another type of second mortgage that uses your home as collateral. You can typically withdraw from the credit line for 10 years, after which your access to the credit line ends and the repayment period begins.

How to qualify

Most lenders require a maximum 85% LTV ratio as part of their HELOC requirements. As with cash-out refinances and home equity loans, HELOC lenders will also review your overall financial profile, including your DTI ratio and credit history. Expect to need a minimum 620 credit score, though a score of 740 or higher can help you get the lowest interest rates.

How long does it take to get the money?

It can take up to four weeks to close on a HELOC. Of course, several factors can impact that timeline, such as the appraisal process and documentation delays. You may have to wait a few days, or even weeks, to access your funds after closing.

What to watch out for

Unlike home equity loans, HELOCs usually have variable interest rates. If your rate increases, so will your payments. HELOC starting rates tend to be lower than HEL rates, however, since HEL rates are fixed for the entire loan term. You’ll also pay for closing costs, though they may be lower than HEL closing costs — and they may even be waived altogether.

Alternatives to taking equity out of your home

Personal loan

A personal loan is an unsecured installment loan that doesn’t require collateral. The application process is usually fast and easy — provided you meet lending requirements — and may lead to a decision in as little as a few hours, depending on your lender.

However, personal loan interest rates are typically higher than those of home loans, since there’s no collateral tied to borrowing one. Personal loan repayment terms are also significantly shorter than home loan terms, typically ranging from two to seven years, on average.

Credit card

If you already have a credit card, you can use it right away without worrying about submitting any applications. However, if you have to apply for a new card and happen to get a same-day approval, you’ll likely need to wait for your card to arrive in the mail before you can borrow against your credit line.

But there are downsides to relying on credit cards to pay for emergencies: For one, you’re racking up more debt and adding to your credit utilization ratio, which negatively impacts your credit score. You’ll also pay higher interest rates with credit cards, and these rates are often variable.

 

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