Home Equity Loan

If you are looking to consolidate debt, make home improvements or finance a large purchase; a home equity loan is one of several options you may want to consider. Home equity loans are often referred to as a second mortgage used for converting the equity you have built up in your home into funds. This type of loan product comes with a fixed rate and fixed monthly payment structure with term options ranging from 5 to 30 years.

With a home equity loan, you will receive upfront lump sum funds up to $250,000 and then be required to make fixed monthly payments over the full loan term to pay it back.

A home equity loan creates a second lien against your property in addition to your first mortgage lien. This gives the lender the ability to foreclose against your home if your fail to meet the terms of your new home equity loan agreement.

This type of loan is usually a good fit if you know up-front the amount of funds you'll need to achieve your financial goals. This type of loan does not impact your existing mortgage (if you have one), so it may be a good option if you are satisfied with your existing first mortgage rate and term.

The process for securing a home equity loan will be similar to the process required to obtain your first mortgage as you will have to complete the same credit, appraisal, income and asset review to determine eligibility (among other requirements). Each lender may be different in terms of their individual eligibility requirements, but here are general eligibility requirements to consider before you apply:

• You will need a minimum credit score of at least 680 to qualify.
• Your maximum Debt-To-Income (DTI) ratio will need to be under 50%. You can calculate your DTI by dividing your total monthly debt payments by your gross monthly income (then multiplying by 100 to covert this to a %). Check out our DTI article to learn more.
• You’ll need to have enough equity built up in your home to qualify. We use a Combined Loan-To-Value (CLTV) ratio calculation to determine eligibility. Your CLTV ratio is calculated by comparing the total of all your mortgage loans (which includes the balance of your existing mortgage and your new home equity loan amount) to your home’s value. The formula for calculating CLTV is: CLTV = (total of all mortgage loans / property value) x 100. The current maximum CLTV ratio for a PNC Home Equity Loan is capped at 85%. CLTV ratios and qualification requirements are subject to change. See our LTV article to learn more about this important concept.

Home equity loans offer a fixed interest rate, where the rate and principal interest payment will remain the same throughout the life of the loan. Your rate is calculated based on a variety of factors, including credit qualifications, combined loan-to-value, loan amount and other criteria.

For home equity loans, where you borrow a set amount of money all at once and pay off the loan as agreed over a specified time period, the interest charge is included in your monthly payment. A certain amount of that payment goes toward paying off your principal; another portion goes toward paying off the loan’s interest. While the monthly payment amount may stay the same over the life of the loan, a higher percentage of it may go toward interest early in the loan’s life, with larger amounts going toward the principal with subsequent payments.

Home Equity Loans (HELOAN) may offer slightly lower interest rates compared to a Home Equity Line of Credit (HELOC) and slightly higher interest rates compared to a Cash-Out Mortgage Refinance. Check out our Interest Rate article to learn more.

In terms of fees, a HELOANs will typically offer the lowest cost option when compared to a HELOC or Cash-Out Mortgage Refinance. In fact, except for prepaid interest covering the period from closing to the beginning of your first payment period, PNC does not charge any closing cost or fees to open this type of loan (unless you choose to purchase discount points as part of the transaction – see our Mortgage Points article to learn more). In contrast, a Cash-Out Refinance will require that you pay all the standard closing costs (which can average between 3% - 6% of the loan amount). While a HELOC will have higher fees than a HELOAN, the fees for this type of product will be lower than a Cash-Out Mortgage Refinance. If costs are a big factor in your choice, you may find the HELOAN to be a more attractive option for converting your home equity into funds without breaking the bank.

A PNC Mortgage Loan Officer can help walk you through all your product options and help you find the best product that meets your unique needs. Connect with one today.

There are a variety of factors that will determine how much money you can borrow with a home equity loan including factors like credit history, Debt-to-Income Ratio and Combined Loan-to-Value Ratio. The maximum loan amount allowed for a PNC Home Equity Loan is capped at $250,000

Here is a quick example related for illustration purposes: In this scenario, let’s say you have an existing mortgage balance and want to determine how much you may be able to borrow with a new home equity loan. At PNC, we require that you keep at least 15% equity in your home to qualify, which equates to having a Combined Loan-To-Value ration of 85%. Let’s say you got your first mortgage loan for $400,000 and paid down that balance over time to $200,000. Let’s also assume that your home’s value has increased over the years, bringing the estimated property value up to $500,000. In this scenario, you have technically built up $300,000 worth of equity in your home. However, you will not be able to borrow this full amount due to the 85% CLTV ratio requirements. For a home with a $500,000 property value, you can only borrow up to 85% of the home’s value (in this example, $500,000 multiplied by 85% = $425,000). When factoring in your existing loan balance of $200,000, you can determine an estimate for how much usable equity you may have ($425,000 minus $200,000 = $225,000 in usable equity). Therefore, if you were able to take out a home equity loan for the maximum amount of equity available in your home ($225,000), your CLTV would meet the 85% requirement: CLTV = (existing mortgage balance of $200,000 + new home equity loan amount of $225,000/property value of $500,000) x 100 = 85%.  

A Home Equity Line of Credit (HELOC) and a Home Equity Loan (HELOAN) both allow homeowners to convert part of their home equity into funds. They both will use your home as collateral to secure the loan, and they both will have no impact on the rate or terms of any existing mortgages. HELOCs are considered revolving lines of credit that allow ongoing as-needed borrowing, while HELOANs are considered installment loans where you receive a lump sum payment after closing on the loan.

The primary difference between a HELOAN and a HELOC is how loan proceeds are accessed. With a HELOAN, you will receive the amount borrowed in a single lump sum with a predetermined repayment schedule. But with a HELOC, you are granted a line of credit that you can access as needed. Eligible borrowers are approved for a maximum credit limit and can draw up to the predetermined limit. Borrowers repay the amount drawn on a monthly basis, as outlined by the terms of their HELOC contract.

Another important difference between a HELOAN vs. a HELOC is the interest rate. HELOAN’s offer fixed interest rates, meaning the rate is locked in for the term of the loan (typically 30 years). HELOCS, on the other hand, offers variable interest rates that fluctuate with changing market conditions during the initial draw period (typically 10 years), followed by a fixed interest rate during the repayment period (typically 30 years). PNC also offers a unique HELOC product feature that allows you to lock and unlock part of all of your balance into fixed and/or variable APR as needed.^[3]

Note: The lock/unlock feature is only available during the draw period.

A HELOC may be a better fit if you want ongoing access to funds but aren’t sure how much you will need. While a HELOAN may be a better fit if you know exactly how many funds you need upfront to achieve your financial goals. Again, both are good options if you do not want to make changes to your existing mortgage.

Check out our HELOC vs HELOAN article to learn more.