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The Fastest Way to Tap Your Home Equity

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Everyone has an unexpected financial crisis that pops up from time to time, causing plenty of unwanted stress. A home repair needs to be done right away or an emergency car bill needs to be paid — whatever the scenario, the need for more money is crucial and worrisome.

Getting the funds to pay for these tough financial situations can sometimes seem impossible. But if you’re a homeowner, you may be able to tap your home equity for those unexpected bills.

There are three main options to help take advantage of your home equity: a cash-out refi, home equity loan and home equity line of credit (HELOC). Determine whether one of these options may be right for you by reading more about them below.

How fast does a cash-out refinance close?

With a cash-out refinance, you take a larger loan than needed to pay off your current mortgage and use the amount left over to pay for what you need. The funds are disbursed to you in one lump sum, so you have it all right away, and interest rates are usually lower than both unsecured loans and home equity loans. While each lender’s limits vary, you usually can borrow up to 80% of your home’s overall value, maxing out at 85%.

Just beware that closing costs can be high, adding up to about 2% to 4% of the loan amount.

How to qualify

When applying for cash-out refinance, borrowers need to have their own home with equity of around 20% upon closing. Lenders will also look at the borrower’s financial history to ensure they are able to repay the loan. Other attributes can include the borrower’s current debt-to-income standing and credit history with a credit score of usually around 670 or higher.

How long does it take to get the money?

A cash-out refinance can take around 45 and 60 days to close but can be less, say around 30 days, varying with each lender. The appraisal process can sometimes cause slowdowns. You’ll first need to get an appointment, then the appraiser may need to conduct more research on comparable homes in your neighborhood for an accurate valuation. To help the process run as smoothly as possible, have all your required documents, such as deeds and floor plans, ready to go so you’re not left searching for anything and slowing down the closing process.

Once you close, you can usually expect to receive money in about a week, but the time frame can vary between lenders.

What to watch out for

Before deciding on a cash-out refinance, remember that your home is used for collateral, which means if you can’t make payments, your house could be taken away. A cash-out refinance can also result in you paying more for your loan due to interest, and it has plenty of closing costs and fees to consider.

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How fast does a home equity loan close?

A home equity loan is essentially a second mortgage, which borrows against your first mortgage. These types of loans usually have fixed rates and offer a large amount of money all at once. Home equity loans also have a set term with fixed monthly payments that include the principal and interest.

In order to know how much you can borrow, you’ll need to determine the value of your home first. Once you know the value, you will then need to subtract the amount you still owe on your mortgage to determine your home equity. Gaining this information can help you understand how much you can borrow since you will be borrowing against the equity in your home. However, the exact amount you can borrow can vary with each lender, with most not going over 85% of your home value, minus what you still owe, but some allowing up to 90% to 95%.

The closing costs can be roughly 2% to 5% of the loan.

How to qualify

To qualify for a home equity loan, your current home equity will be considered, along with your loan-to-value (LTV) ratio. For example, if you have a home valued at $300,000, owe $150,000 on your mortgage and want to take out a home equity loan of $100,000, your LTV would be 83%. Most lenders want the borrower’s LTV ratio to be 90% or less. A borrower’s debt-to-income ratio and credit history can also be considered, which can include a credit score of 670 or higher, with some exceptions, depending on the lender. Lenders may also want to perform a title search to inquire about any unpaid property taxes.

How long does it take to get the money?

The closing time for a home equity loan can usually take anywhere from two to four weeks, after all required personal and financial documents have been turned in, and the appraisal is complete.

Once you close, you can expect to receive your funds right after closing or within a few weeks, although the actual length of time can depend on the lender.

What to watch out for

A home equity loan might be a good option for some, but there are things to keep in mind before you make a firm decision. Interest rates can be on the high side, especially when compared with a cash-out refinance, and there are significant closing costs and fees associated with a home equity loan. Your home can also be taken away if you fail to make your loan payments.

How fast does a home equity line of credit close?

A home equity line of credit (HELOC) can provide you with some extra cash by allowing you to borrow up to 85% of your home’s value.

However, instead of receiving one large sum of money upfront, you can withdraw the amount you need when you need it, usually within a 10-year time frame. When it comes time to pay back the loan, you will need to make payments that include both the amount borrowed and the interest.

How to qualify

When applying for a HELOC, most lenders will only allow you to borrow 80% to 90% of the equity in your home. As with cash-out refinancing and home equity loans, lenders that offer a HELOC will also look at your financial history, how much you want to borrow, debt-to-income ratio and a credit score of 620 or higher, depending on the lender. However, for your best rates, you’ll likely need a score of at least 670.

How long does it take to get the money?

When closing on a HELOC, you’re usually looking at around four weeks for the process to be complete. Of course, several factors can impact that timeline, such as the appraisal process and having all proper documentation upfront.

Upon closing, you can usually receive your funds rather quickly, although it depends on the lender. You may have to wait a few days or even weeks to access your funds after closing. However, if you already have a HELOC open and ready to use, you’ll have on-demand access to your funds, as long as your HELOC is in the draw period.

What to watch out for

Unlike home equity loans, HELOCs do not have fixed interest rates, which mean they can change over time. If your rate increases, so will your payments. And as with home equity loans and cash-out refinance, your home’s equity is collateral, meaning your home could go into foreclosure if you miss payments. HELOCs may also have closing costs and fees.

Faster alternatives

A cash-out refinance, home equity loan and HELOC are all valid options when you need to borrow extra money, but they aren’t the only ones to consider. There are alternatives that can provide you with extra funds fast.

Personal loan

A personal loan is a lump-sum installment loan, but unlike a home equity loan, a personal loan doesn’t use a borrower’s home as collateral. The application process is usually fast and easy (as long as you have the correct requirements for the given lender), allowing you to get a decision on the spot and your money delivered as fast as 48 hours in some cases.

However, because personal loans are unsecured and don’t require collateral, interest rates can be high. Personal loan terms aren’t always very long either, with the average consisting of two to seven years.

Credit card

A credit card allows you to use the money you need when you need it, as long as you have the available credit within your current account. If you already have a credit card with available credit, you can use it right away without worrying about any extensive application process. However, even if you have to apply for a new card, you can sometimes get approved the same day — you may need to wait until it arrives in the mail to use it. There are also reward programs that can give you cash back or travel points on certain purchases.

But there are plenty of downsides to using credit cards, one being you’re racking up more debt that doesn’t look good on your credit report. You’re also likely to pay high interest rates with credit cards, and these rates can fluctuate because they are often variable. Plus, not all credit cards provide you with a lot of money to use upfront, especially if you already have a lot of current credit card debt.

The bottom line

Your home equity can provide you with extra money when you need it for an emergency, but it’s not something to consider lightly. In order to tap your home equity, your house is likely used as collateral, and there are many fees and closing costs that can add up. It’s best to look at all options and weigh the pros and cons to determine whether using your home equity is the smartest option for your financial needs.

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