If you’re looking for ways to get cash for bills, home renovations or other expenses, your home equity could provide a solution. There’s more than one way to tap into your equity, though. We’re breaking down the pros and cons of a home equity loan vs. a HELOC vs. refinancing with cash out.
Home values in Arizona have increased in the past few years, causing many homeowners to consider borrowing against their home’s equity. What is equity? The difference between the value of your home and the amount you still owe on your mortgage.
For example, if your home is currently valued at $450,000 based on a home appraisal and you have a $175,000 balance remaining on your mortgage, you would have approximately $185,000 in equity. You may be able to borrow against your equity if you need funds for repairs, remodeling, bills or other expenses. While lenders won’t typically loan you the full value of your home’s equity, they may loan up to 80% of it on average.
Typically, the lender will arrange for a home appraisal to value your home with any of these options.
Have you ever considered borrowing against the equity in your home to access funds for renovations, debt consolidation, or other financial goals? If so, a home equity loan from Desert Financial could be a smart financing option for you.
As a leading credit union in Arizona, Desert Financial offers competitive home equity loan rates and flexible terms to help members tap into their home equity. In this comprehensive guide, we’ll explain what a home equity loan is, who can qualify, how it works, and why Desert Financial is one of the top lenders for home equity borrowing
What is a Home Equity Loan?
A home equity loan allows you to leverage the equity built up in your home to borrow money at an affordable interest rate.
Equity is defined as the current market value of your home minus any outstanding mortgage debt still owed on the property. For example if your home is worth $300000 and you owe $180,000 on your mortgage, you would have $120,000 in equity.
With a home equity loan, you can borrow against a portion of that equity – usually up to 85% – and receive lump sum of cash upfront. The loan amount, interest rate, and repayment terms are fixed over a set period, usually 5 to 30 years.
Home equity loans are commonly used to:
- Finance home improvements and renovations
- Pay off high-interest debt
- Cover large medical expenses
- Pay for a child’s college education
- Consolidate other debts into one monthly payment
Unlike home equity lines of credit (HELOCs), home equity loans provide you with the full loan amount upfront in a single disbursement. This makes them a better option if you need a specific amount of cash for a one-time expense.
Who Qualifies for a Desert Financial Home Equity Loan?
To qualify for one of Desert Financial’s home equity loans, you must:
- Be a current Desert Financial member
- Have sufficient equity in your home
- Have a good credit score – generally 680 or higher
- Show consistent income to repay the loan
Your home equity and creditworthiness are the two biggest factors lenders review when approving borrowers.
The more equity you have, the higher the loan amount you can qualify for. Just keep in mind that lenders typically limit equity loans to 80-85% of your total equity to protect the remaining equity in your home.
For example, with $100,000 in equity, you may qualify for around $80,000 as your maximum home equity loan amount.
Your credit score gives the lender insight into how reliably you’ve repaid debts in the past. Excellent credit means you’re more likely to repay the home equity loan as agreed. That’s why ideal candidates have credit scores of 680 or higher.
How Much Can I Borrow Against My Home Equity?
As mentioned above, lenders typically limit home equity loans to 80-85% of your total equity. This protects the remaining equity cushion in your home.
Let’s look at some examples to understand loan amounts:
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Home value: $350,000
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Mortgage debt: $200,000
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Equity: $150,000
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Max home equity loan: Up to $127,500 (85% of $150,000)
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Home value: $425,000
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Mortgage debt: $150,000
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Equity: $275,000
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Max home equity loan: Up to $220,000 (80% of $275,000)
Always keep in mind that the maximum you can borrow depends on factors like your income, debts, and credit score, not just your equity. Work closely with your Desert Financial loan officer to determine the optimal loan amount for your unique financial situation.
Desert Financial Home Equity Loan Rates
Our current interest rates on home equity loans range from 7.99% APR to 18.00% APR depending on your creditworthiness, loan amount, and loan-to-value ratio.
Rates are fixed for the entire repayment period, so you’ll have peace of mind knowing your monthly payments will never change. No surprises!
We offer flexible terms from 5 years up to 30 years. The longer the term, the lower the monthly payment. However, you’ll pay more interest over the life of the loan with a longer term.
Get in touch with Desert Financial to receive a personalized quote with exact rates and terms tailored for you. As a not-for-profit credit union, our rates are competitively priced to save members money.
How Does the Home Equity Loan Process Work?
Applying for a home equity loan from Desert Financial is straightforward and efficient. Here is a brief overview of what to expect:
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Complete the application: Apply online or at a branch. You’ll provide details on income, debts, the property, and more.
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Home appraisal: We’ll arrange for an appraisal to confirm the current value of your home. This verifies the amount of equity available.
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Underwriting: We’ll review your credit, income, debts, and collateral to approve the loan and finalize terms.
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Closing: After signing final paperwork, we’ll distribute the loan funds directly to you in a lump sum.
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Repayment: Based on the agreed schedule, you’ll make fixed monthly payments until the loan is paid off.
The entire process usually takes 2 to 3 weeks from application to funding. It’s fast and simple with Desert Financial guiding you every step of the way.
5 Benefits of a Desert Financial Home Equity Loan
Why choose Desert Financial for your home equity loan? Here are the top five benefits our members enjoy:
1. Fast Access to Cash
With a home equity loan, you receive the entire approved loan amount upfront as a single disbursement. No waiting around for funds like you would with a HELOC.
2. Fixed Payments
Your monthly principal and interest payment will never change with a fixed interest rate and term. You can easily budget knowing your payment is stable.
3. Flexible Terms
Choose a repayment term between 5 and 30 years. The longer the term, the lower the monthly payment.
4. No Home Equity Required
Desert Financial offers home equity loans even if you have minimal equity available. Speak to a Loan Officer for options.
5. Local Servicing
We service our home equity loans in-house. You won’t be transferred to an impersonal out-of-state servicer.
Alternatives to Home Equity Loans
While home equity loans have many perks, they aren’t the only way to leverage home equity. Two popular alternatives are:
Home Equity Line of Credit (HELOC) – With a HELOC, you’re approved for a revolving credit line secured by your home. You can draw against the line as needed and only pay interest on the amount used. HELOCs have variable rates and offer more flexibility than fixed-rate installment loans.
Cash-Out Refinance – This option lets you refinance your existing mortgage to a higher balance and receive cash back at closing. You end up with a new, larger mortgage to repay. The benefits are tapping equity while potentially scoring a better mortgage rate.
Talk to one of our Loan Officers about which option best aligns with your financial objectives.
Apply for a Home Equity Loan Today!
As you can see, a Desert Financial home equity loan offers an affordable and convenient way to access your equity for anything from home renovations to debt consolidation.
With competitive rates, flexible terms, and local servicing, we have you covered. To get started or learn more, chat live on our website or stop by any branch to speak with a Loan Officer.
Let your home equity work for you!
HELOC: Flexibility & options
A HELOC, or home equity line of credit, also borrows against the equity you have in your home. HELOCs typically have variable rates, which means your interest rate will fluctuate up and down with the market.
Heres how a HELOC works:
- After being approved for a HELOC, the approved amount acts like your credit limit on a credit card.
- You may choose to withdraw some or all of your HELOC funds as you need them.
- Withdrawals, also known as advancements, are able to be taken during your draw period (typically, 5 to 10 years).
Example: Let’s imagine that you are approved for a $35,000 HELOC. You withdraw $5,000 from your HELOC to pay some urgent bills. Five months later, you withdraw $10,000 to pay for a bathroom remodel. At this point, you have used a total of $15,000 of your HELOC funds, leaving $20,000 still available.
Your monthly payment on a HELOC is based on your total outstanding balance, whether the amount used was taken as a one lump sum or as multiple advancements.
Some lenders, such as Desert Financial, offer a hybrid HELOC with the option of a fixed rate on certain withdrawals. This type of loan allows you the flexibility of a traditional HELOC while still offering the peace of mind of a set interest rate.
To sum up, benefits of a HELOC include:
- It’s flexible and easy to use
- You can withdraw funds only as you need them
- There’s a fixed-rate option available to help you plan your payments
This type of loan works well for situations where you may need the money in smaller increments over time — for example, if you’re planning to complete several remodeling projects in the coming years or if you have multiple goals you want to reach (such as consolidating high-interest debt payments and paying for home repairs).
Refinancing: One loan for everything
The third option for tapping into your home equity is refinancing your mortgage with a cash-out option. In this scenario, you are replacing your current home loan with a new home loan for a larger amount than what you currently owe in order to access funds from your available equity.
Let’s return to our $450,000 home value example, where your current mortgage balance is $175,000. You work with your lender to get $50,000 cash out with a mortgage refinance. So, your new mortgage amount would be $225,000 — your existing $175,000 balance plus the additional $50,000 cash you are borrowing from the equity in your home.
Your new mortgage may have a fixed or variable interest rate depending on the type of loan. The upside of a fixed rate is that your payment amount will be the same every month, making it easy to plan for. However, if interest rates go down, you wouldn’t automatically get the lower rate. With a variable rate, you’ll be able to take advantage of low points in the market; however, you would also have your rate rise with increases in the market.