A home equity loan is one tool you can use to borrow from your home equity and turn it into cash. But it’s not available to everyone. You’ll need a good amount of equity in your house to qualify. And to prove you have that equity? Most home equity loan lenders will require an appraisal.
Home appraisals assess your home’s value and ensure there’s enough of a difference between the value and your mortgage balance to support another loan without you and the lender taking on too much risk. If not, you’ll need to explore other options for cash.
Are you considering a home equity loan but not too keen on getting an appraisal done? Here’s what homeowners need to know about no-appraisal home equity loans and how to get one.
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A home equity loan is a type of second mortgage. It lets you borrow from your home equity — or the percentage of your home you own outright — and turn it into cash.
Home equity loans give you a lump sum after closing as opposed to a home equity line of credit (HELOC), which lets you draw money over a period of time. You typically pay the home equity loan balance off over five to 30 years. They have fixed interest rates, and you can use the money for any purpose.
Home equity loans typically require appraisals because you need to know your home’s market value to determine how much equity you have. You’ll then take the market value and subtract your current mortgage balance to get your total home equity.
Most mortgage lenders will let you borrow up to 80% of your home’s value, retaining at least a 20% equity stake after factoring both your current mortgage balance and the new home equity loan amount. Here are a few examples of how that would and wouldn’t work on a $400,000 house:
Current mortgage balance: $200,000
Home equity loan amount you’re applying for: $100,000
Total amount you’re borrowing: $300,000
Total equity used: 75%
$300,000 / $400,000 = 0.75
0.75 x 100 = 75%
Current mortgage balance: $250,000
Home equity loan amount you’re applying for: $100,000
Total amount you’re borrowing: $350,000
Total equity used: 87.5%
$350,000 / $400,000 = 0.875
0.875 x 100 = 87.5%
In the examples above, scenario 1 would allow you to qualify for a home equity loan, while example 2 — which exceeds that 80% threshold — would not. (To be clear: Most lenders cap you at 80%. Some, such as Rocket Mortgage, allow you to borrow up to 90%.)
At the end of the day, lenders need to be sure you don’t borrow too much of your home’s value. In case you fail to make payments, the lender needs to be able to sell your home and make enough to cover the remaining balances on your loan. The company can’t do that if your loan balances exceed the home’s worth.
Dig deeper: What is a combined loan-to-value ratio (CLTV), and why should borrowers care?
Some lenders will allow you to get a home equity loan without going through the appraisal process. For example, they may not require an appraisal if you’re only borrowing a small amount. Others may be willing to use an existing appraisal if it was completed recently or if you already have a preexisting relationship with the lender.
Skipping the appraisal can save you time and money. An appraisal fee usually adds a few hundred dollars to your home equity loan closing costs.
If you’re considering a no-appraisal home equity loan, you’ll need to shop around, as not all lenders offer the opportunity to skip the appraisal. If you take this route, know that you may be limited to a lower loan amount due to the extra risk.
Learn more: How much can you borrow with a home equity loan?
Forgoing an appraisal is a risk for your lender, but it’s also risky for homeowners. Inadvertently borrowing too much of your home’s value could put you in trouble if your local housing market takes a downturn. This could put you upside down on your mortgage, causing you to owe more than it’s worth.
Always talk to a loan officer or financial professional to be sure this is the right move for your finances before moving forward. You can also ask a local real estate agent for a comparable sales report before you get your home equity loan. This will give you an idea of what homes similar to yours are worth in the current marketplace.
If you’re worried about the appraisal aspect of getting a home equity loan, there are many other financing options you can explore.
You might look into:
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Cash-out refinancing: A cash-out refinance replaces your current mortgage with a new one, only with a larger balance. You then get the difference between those two balances in cash to use however you’d like. Remember that this will replace your loan entirely, giving you a new interest rate, term, and monthly payment. Depending on market conditions, this may or may not work in your financial favor.
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Personal loans: You could use a personal loan to access cash, and it typically doesn’t require using property as collateral like a mortgage does. Interest rates will be higher than those on a mortgage product, including a cash-out refinance or home equity loan.
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Credit card: Credit cards should be a last resort if you absolutely need money. They can carry interest rates of well over 20% and should be used sparingly unless you know you can pay off the balance every month.
Talk to a financial professional if you’re unsure how to get the financing you need. They can walk you through your options and the pros and cons of each loan for your unique situation.
Dive deeper: Home equity loan vs. personal loan — Which is better for home improvements?
Most mortgage lenders require an appraisal for home equity loans, but there are some instances when you don’t need one. A lender may accept an existing appraisal that was completed recently. Other lenders might allow you to skip the appraisal if you’re taking out a smaller loan.
A home inspection, which evaluates a property’s condition, is not required for a home equity loan. However, an appraisal, which assesses the value of your home, usually is. House inspections are typically only used when initially purchasing a home to give you more information about its condition.
That depends on many variables, including the interest rate you qualify for and your chosen loan term. A 20-year home equity loan with an 8% interest rate would give you a monthly payment of about $418.
Laura Grace Tarpley edited this article.