As you pay down your home mortgage, you build equity—the difference between your loan balance and your home's current value. With enough equity, you can borrow using your home as collateral via a home equity loan (or a home equity line of credit, also known as a HELOC). A home equity loan can be a convenient way to access cash for home improvements, college tuition, and other large expenses.
Of course, if you need that cash sooner rather than later, you might be wondering how long it takes to get a home equity loan. The answer depends on your lender, how well you're prepared, and how long it takes to schedule an appraiser and a closing attorney.
- A home equity loan (also called a second mortgage) lets you tap into your equity without selling or refinancing your house.
- Your home secures the loan, and your lender can foreclose if you stop making payments.
- Your lender gives you a lump-sum payment, which you repay with interest over a set loan term.
- The amount you can borrow is based on your income, credit history, the equity you've accumulated, and your home's current value.
- When you apply for a loan, it usually takes between two weeks and two months to close the loan and get your cash.
What Is a Home Equity Loan?
A home equity loan (aka a second mortgage) lets you borrow money using your home as collateral. Your lender gives you a lump-sum payment that you repay with interest each month over a fixed term, usually between five and 20 years. The amount you can borrow is based on your income, credit history, your home's current value, and the amount of equity you have accumulated. According to the Federal Trade Commission (FTC), many lenders prefer that you borrow no more than 80% of the equity in your home.
Home Equity Loan Requirements
The qualifications for a home equity loan vary by lender, but most generally require borrowers to have a:
- Minimum of 15% to 20% of home equity
- Credit score of at least 620
- Debt-to-income (DTI) ratio below 50% (below 43% is preferred)
- Steady income record
Additionally, your lender may require an appraisal to confirm your home's value—and you'll pick up the tab at closing.
The average price for a single-family home appraisal is $375 to $450 as of March 2022, according to Fixr.com, which provides cost guides, comparisons, and information for home remodeling, installation, and repair projects.
How Does a Home Equity Loan Work?
If you feel confident that you meet the minimum loan requirements, the basic steps involved in getting a home equity loan are as follows:
- Choose a lender. It's a good idea to compare deals from at least three lenders, including your current loan provider.
- Apply. You will need to answer questions about your income, debt, and home and submit several documents.
- Get an appraisal. If your lender requires an appraisal, they'll arrange one with a licensed, unbiased appraiser familiar with the area.
- Underwriting. When the lender has your application, supporting documents, and the appraisal report, an underwriter reviews everything to decide whether to approve or deny your loan application.
- Close. If you're approved for the loan, you'll meet with your lender, attorney (if required), and a notary to sign the loan documents and finalize the loan. You have three days to change your mind and cancel the loan. When that period ends, you'll receive your funds—assuming you keep the loan.
How Fast Can You Get a Home Equity Loan?
The entire home equity loan process takes anywhere from two weeks to two months. A few factors influence the timeline—some in and some out of your control:
- How well you're prepared. Your lender will want to see copies of your current mortgage statement, property tax bill, and proof of income. If you don't have these readily available, it might take your lender longer to process your application.
- The underwriting process. Your lender will review your credit score, DTI ratio, and other financial details. Depending on the complexity of your financial situation, you may have to provide supplemental information, which can draw out the process.
- Timing of the appraisal. Your lender will hire a licensed, third-party appraiser to confirm your home's value (and ensure the loan amount makes sense). This step can take longer than expected if the appraiser has a busy schedule.
- Timing of the closing. Some states require an attorney to be present during a loan closing. If so, the closing can be delayed if you have to work around your attorney's busy schedule.
Can You Use a Home Equity Loan to Pay Off a Mortgage?
Many homeowners use home equity loans to pay for renovations, college costs, or other big expenses. However, because you can use home equity loan proceeds to pay for anything, it's possible to pay off a mortgage with the funds. This strategy can make financial sense if you lock in a lower interest rate and a lower monthly payment. However, consider the closing costs of the home equity loan and any prepayment penalties on your existing loan before making any decisions.
Can You Pay Off a Home Equity Loan Early?
You may be able to save hundreds or thousands of dollars by paying off your home equity loan early—but that's not always the case. Many lenders charge a prepayment penalty equal to several months of interest or a percentage of the loan balance.
If you already have a loan, check your loan documents (or ask your lender) to see if it includes a prepayment penalty clause. That will help you decide if paying off the debt ahead of schedule makes financial sense. If you're in the market for a home equity loan and plan to pay it off early, look for lenders that don't have a prepayment penalty.
What Is a HELOC?
A home equity line of credit (HELOC) lets you borrow against the equity in your home, but it works differently than a home equity loan. With a home equity loan, your lender gives you a set lump sum that you repay with fixed interest and fixed payments. On the other hand, a HELOC is a revolving line of credit with variable interest rates and payments.
The Bottom Line
A home equity loan can come in handy if you need cash to pay for home repairs, college expenses, medical bills, or other big expenses. However, it can take a couple of months to get your hands on the cash while you wait for your lender to process, approve, and close the loan. Completing the loan application accurately and having your documents ready can expedite the process so you can cover your big expenses sooner.