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Cash-out refinancing was all the rage during the low-rate environment of the pandemic, but with current mortgage rates well above 5%, home equity lines of credit are now taking their turn in the spotlight.
A home equity line of credit, or HELOC, is a type of loan that allows you to borrow against the equity in your home without touching your primary mortgage, which is why it is commonly known as a second mortgage.
Compared to other ways to tap into home equity, like cash-out refinancing or home equity loans, HELOCs can offer relatively low rates and added flexibility that many homeowners love. Because of this, they are a good option for those looking for low-cost financing secured by their home, says Vikram Gupta, executive vice president and head of home equity at PNC Bank.
- 1 How soon can you get a HELOC after buying your home?
- 2 Factors that affect the time to obtain a HELOC
- 3 Is it worth getting a HELOC?
- 4 Alternatives to obtain a HELOC
Be sure to compare quotes from multiple lenders to get the best HELOC rate.
The process to apply for and get approved for a HELOC can take anywhere from a few weeks to a few months, but if you have enough equity in your home and good credit, it may be easier than you think. And while the amount of equity in the home will limit whether you can get a HELOC and how much you can borrow, there is no hard time limit on how soon you can open a HELOC after closing on your new mortgage, so as long as you’re prepared for debt.
Here’s what you need 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 home, you may not have to wait as long as you think.
“You can get a home equity line of credit at the same time you get your mortgage,” says Gupta. It’s called an “overlay loan” and it can help you expand your borrowing capacity. For example, a bank might be willing to lend up to 80% of the value of your home in a mortgage and then lend another 10% of the value at the same time in the form of a HELOC.
Most commonly, borrowers look at HELOCs after they have obtained their primary mortgage. But as long as you have the equity, you can start.
“It could be immediately, on day one, or 45 years later,” says Gupta. “There are no limitations as to when [the borrowers] you can start the process.”
But the equity issue is important: There are limits to how much your home equity lenders are willing to let you take out. For example, if your mortgage is 90% of your home’s value (known as loan-to-value), it’s probably too early to start considering a HELOC. You will need to wait until you pay off 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 may be eligible for a HELOC sooner than others.
Even if you have a lot of home equity right after you closed on your house—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 another monthly cost. And in general, the less debt you have, the better, so it’s not always a good idea to take out two large loans at the same time.
Factors that affect the time to obtain a HELOC
Once you’ve decided to pursue a HELOC, there are a few variables that will affect how quickly your loan is processed.
“It’s almost identical to the mortgage process and therefore the mortgage timeline,” says Gupta. You’ll need to provide much of the same documentation, and it’s likely to take 30 to 60 days, he adds.
This is what that timeline depends on:
Your loan-to-value ratio
If your mortgage is only 50% of your home’s value and you’re looking at a HELOC for another 10%, a lender will likely view it as a low-risk loan because there’s still plenty of equity left over. However, if you’re trying to borrow up to 80 or 90% of your home’s value, a lender will order a home appraisal to confirm your home’s value, which can add weeks to the process.
When it comes to securing a loan of any kind, lenders like to see strong applicants with a good credit score and ample income. If a bank can quickly assess that you are a good applicant, the process is likely to move faster.
“If it’s low risk to the bank, they’re trying to streamline the process,” says Gupta. Sometimes well-qualified applicants may find that the loan process takes less than 30 days.
If you have a lower credit score, or if you have a difficult financial situation that involves a lot of documentation, that could delay approval.
Is it worth getting a HELOC?
There are certainly advantages to getting a HELOC, but you should also be aware of the drawbacks.
“The advantage, definitely, is basically the no cost and timeliness of getting the loan,” says Devin Pope, Partner and Senior Wealth Advisor at Albion Financial Group, referring to the fact that often (but not always) there is no upfront fees or closing costs associated with obtaining a HELOC.
Another plus, Pope says, is the flexible payment schedule, which allows you to pay “interest only” on a HELOC over a certain period of time if you choose. And many borrowers like that a HELOC works much like a credit card, where you can access an at-will revolving line of credit and only pay back the amount you spent during the draw period.
But there are downsides: Pope points out that HELOCs often have variable interest rates, meaning your interest rate — and by extension, monthly payment — could change unexpectedly in the future.
In addition, Pope says, the flexibility offered by a HELOC can often lead borrowers to misuse 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 looking to borrow money: “How fast do you want it and how long are you willing to wait? Because the faster you want it, the more expensive it will be,” he says.
A credit card, for example, is immediately available, but has the highest interest rates. While a HELOC that takes weeks or months to be approved has some of the lowest interest rates.
If you’re willing to wait, HELOCs are a good option for financing 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 owe nothing in return. But Pope cautions against using HELOCs for non-essential purchases (like a luxury car or boat) or to cover daily living expenses.
Right now, rising interest rates are also complicating the decision to get a HELOC. The market is moving away from a period of historically low rates, and rates are likely to rise steadily in the coming years. Because HELOCs have variable interest rates, Pope says he should be prepared for the possibility that the cost of borrowing through a HELOC will rise in the years to come. But Gupta also points out that some lenders offer HELOCS where you can lock in rates on portions of the loan (similar to a fixed-rate home equity loan), allowing you to protect yourself against future rate increases.
Alternatives to obtain a HELOC
Home Equity Loan
A home equity loan is very similar to a HELOC in that it is 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 may be a better option than a HELOC if you need all the funds up front, for example for a major home renovation or to consolidate other debts. Home equity loans also have the advantage of being a fixed-rate loan rather than a variable-rate loan, but the trade-off is that they generally have a higher initial interest rate than a HELOC.
Refinancing with cash out
Cash-out refinancing is a process where you can refinance your primary mortgage to create a larger loan, allowing you to take out the difference between your original mortgage and your larger new mortgage in cash. This is also a good option if you need a lump sum of money all at once and it has the advantage of being a fixed interest rate, compared to a variable HELOC rate. But if you recently secured or refinanced a mortgage with a low interest rate, you may not want to refinance and lose your rate; that’s a scenario where Gupta recommends opting for a HELOC instead.
Unsecured personal loans are a form of loan that can be used for almost any purpose, and their flexibility is a great advantage. But because they’re not secured by your home’s equity like a HELOC is, lenders view them as a higher risk and the interest rates are typically higher. However, they can be quicker to obtain than a HELOC, and some lenders offer same-day financing and loan approval. Personal loans can be a tool for fast financing in small amounts, especially if you can pay it back quickly and avoid accumulating a lot of interest.
Credit card 0% APR (for debt consolidation)
If you plan to use a HELOC to consolidate other forms of high-interest debt, like credit card debt, a 0% APR or balance transfer credit card may be a good alternative. This strategy requires careful planning and discipline, as you want to make sure you pay off the balance before the 0% APR introductory period ends and a high interest rate kicks in. However, if you do it right, you won’t have to. pay no interest at all. And, if you have good credit, getting a 0% APR card is much faster and easier than getting a home equity loan.