Home Equity Loan Process: Everything You Need to Know

In today’s financial landscape, savvy homeowners are increasingly turning to home equity loans (HELs) and home equity lines of credit (HELOCs) as powerful financial tools to fund various ventures, from home renovations to important life expenses. As property values continue to rise incrementally, these options have become more attractive than ever.

Here, we provide a comprehensive guide to understanding the home equity loan process and HELOC applications, enabling you to leverage your home’s value effectively and make informed financial decisions. Whether you’re a homeowner with an eye on your home’s potential or someone looking to explore the world of home equity financing, read on to discover the insights you need.

Home Equity Loans vs. HELOCs: Key Distinctions

Before you begin an application for a home equity loan or HELOC, it’s important to understand the differences between the two so you can make the best decision for your situation. HELs and HELOCs are two distinct financial products, each catering to different needs.

A home equity loan (HEL) provides borrowers with a lump sum of money at a fixed interest rate, using their home as collateral. Loan repayment occurs through monthly installments over a predetermined term. The significant advantage of HELs is their predictability; you’ll know precisely how much you owe each month, making budgeting more manageable.

On the other hand, a home equity line of credit (HELOC) operates differently. Like HELs, HELOCs also use your home as collateral. However, the key distinction lies in the flexibility of HELOCs. Instead of receiving a lump sum upfront, HELOCs provide a revolving line of credit that allows you to draw funds as needed, similar to using a credit card—although with much more favorable interest rates. You only pay interest on the amounts you withdraw, making HELOCs a versatile option for ongoing expenses such as home renovations.

The Home Equity Loan Process: A Step-by-Step Guide

Once you’ve determined which type of financial offering best fits your needs, it’s time to get down to the nitty gritty: the actual application. Whether you decide a home equity loan or HELOC aligns best with your financial objectives, the processes are similar. Here, we break down the steps involved in securing these types of loan:

Step 1: Assess Your Home Equity

The amount you can borrow through a home equity loan or HELOC is contingent on the equity you have in your home. Equity represents the difference between your home’s current market value (often referred to as the appraised value) and your outstanding mortgage balance.

In compliance with lending regulations, lenders can typically issue loans up to a certain percentage of your home’s equity. In Texas, the maximum amount lenders can issue for HELs or HELOCs is 80% of your total home equity. That means that if your home is currently worth $600,000, but you still owe $200,000 on your mortgage the maximum loan amount you could secure would be $280,000.

Step 2: Due Diligence Period

The home equity loan process typically involves a due diligence period that can vary in duration. In Texas, due diligence requirements mean the process usually lasts 30–45 days. During this period lenders review your application, conduct necessary assessments, and ensure compliance with relevant regulations. It’s essential to be aware of any time frames associated with the loan application process, as this can impact your ability to access funds promptly. Some lenders may offer expedited options, albeit with different terms, for those in need of quicker access to funds. For instance, Amplify offers Homeowner Express Loans, which have higher interest rates, but which can be accessed within 24 hours of approval.

Step 3: Initiate the Application

Begin the process by filling out an application form provided by your chosen financial institution. This form gathers essential information about your financial needs and allows the lender to initiate the review process.

Step 4: Application Review

Once you’ve submitted your application, a representative from the financial institution will review your financial profile and assess your eligibility for the HEL or HELOC. This review typically includes an evaluation of your credit history, employment status, income, and other relevant factors. The goal is to determine your capacity to manage the debt responsibly.

Step 5: Document Submission

Upon approval, you will be required to submit specific documents that verify your financial information. These documents often include recent tax returns, income statements, details about the property to be used as collateral, and any outstanding debt obligations. Timely submission of these documents is crucial for expediting the loan processing time.

Step 6: Approval and Processing

Once your application and supporting documents are reviewed and approved, the loan moves into the processing phase. During this stage, you will receive disclosures outlining the terms and conditions of the loan, which will require your careful review and signature.

Step 7: Notice of Borrower’s Rights

Applicable laws and regulations typically mandate that borrowers receive official notice of their rights and responsibilities in the lending process. This notice ensures transparency and provides borrowers with essential information about their financial commitments. By Texas law, you’re provided official notice of your borrowers’ rights at least 12 days before closing.

Step 8: Closing Arrangements

The final stages of the process involve coordinating the loan closing. At this point, you will receive an itemized list detailing all fees, points, principal, and interest associated with the loan. It’s essential to review these details thoroughly to ensure a clear understanding of the financial terms. Closing costs, administrative fees, and other expenses may apply, depending on the type of loan you choose.

Step 9: Closing Process

The loan closing typically takes place at a designated location, often determined by the lending institution. During the closing, you (and not a representative, if you’re in Texas) are required to be present. This meeting serves to finalize the loan agreement, and you will be provided with the opportunity to ask any remaining questions before proceeding.

Step 10: Review and Cancellation Period

Following the loan closing, you may be entitled to a review and cancellation period, depending on your jurisdiction and the specific terms of your loan. This period allows borrowers to reconsider their decision and, if necessary, cancel the loan without incurring any penalties. Under Texas law, you have three days to cancel the loan or to notify the financial institution you will not be moving forward.

Step 11: Funds Disbursement

If no cancellation occurs during the review period, you can expect to receive the loan funds as specified in your agreement. The timeline for disbursement can vary, but it typically occurs shortly after the loan closing. For instance, Amplify disburses funds for HELs on the fourth day after closing.

Unlocking the Full Potential of Your Home Equity

Home equity loans and HELOCs represent powerful financial tools that enable homeowners to leverage the equity in their homes effectively. As your financial needs evolve, these options provide a means to access funds for various purposes while offering flexibility and favorable interest rates. By navigating the home equity loan process with a trusted financial partner like Amplify Credit Union, you can tap into the potential of your home’s equity.