What is a Navy Federal Home Equity Loan?
Life is full of major expenses that must be paid one way or another. Do you need money to make home improvements or purchase a new car? Do you need money to sustain you through a period of disability? If so, then a home equity loan from Navy Federal Credit Union may be the right answer for you. These fixed-rate mortgage loans can provide you with cash quickly to pay off whatever expenses you need. Read on to find out more about how these loans work and how they can benefit you.
How Navy Federal Home Equity Loans Work
Navy Federal home equity loans are the same in nature and construction as all other home equity loan types offered by banks, credit unions and other financial institutions. They are essentially second mortgages with a fixed interest rate and loan term, which can be as long as 30 years in some cases. Navy Federal offers terms of 5, 10, 15 and 20 years.
The monthly payment is fixed, and unlike with home equity lines of credit, the entire loan amount is dispersed up front in a single lump sum of cash. Borrowers start paying interest on the entire loan balance immediately, and each payment covers both interest and principal. There is no draw period with home equity loans; the entire term of the loan can be considered to be the repayment period.
Of course, the amount of money that borrowers can borrow with a home equity loan will be determined primarily by the amount of equity that they have in their homes. A home with a large amount of equity will be able to provide a larger home equity loan than a home that is already highly leveraged.
The exact amount of home equity that can be loaned is determined by applying the lender’s maximum loan-to-value ratio to the home value, then subtracting the amount of the first mortgage and any other liens on the property. Navy Federal can provide loans for up to $500,000, depending upon the circumstances. Their loan-to-value ratios range from 70% to 100% in some instances.
In many cases, the lender will pay most or all of the closing costs of the home equity loan, such as the application fee, documentation fees, appraisal fee, title fee and other assorted fees. However, the lender may charge these fees back to the customer if they pay off or close their home equity loans within a certain period of time, such as 24 to 36 months.
Qualification & Requirements for a Navy Federal Home Equity Loan
The process of applying for a home equity loan is essentially the same as applying for a primary mortgage. The borrower will have to supply Navy Federal with the following information:
- Personal and contact information
- At least 30 days of pay stubs
- Two years of W2 forms
- A list of all monthly payments and obligations, including first mortgages
- A breakdown of all of the borrower’s debts
- A list of all of the borrower’s liquid assets, such as bank accounts, investment accounts and retirement savings accounts
- A complete listing of the borrower’s real estate holdings, including mortgages
Self-employed borrowers will also usually need to submit two years of federal tax returns along with any K-1 forms that they received. Retired borrowers may be required to submit a Social Security benefit statement as well as benefit statements for any pensions or other retirement income that they receive.
And, of course, Navy Federal will obtain the borrower’s credit score and credit report in order to determine their creditworthiness. The borrower will usually have to authorize this in the application.
An appraisal may also be necessary in many cases. Navy Federal will order this after all initial documents have been submitted. In some cases, an interior inspection may need to be made, especially if the loan is to be used for home improvements.
Once the appraisal is done and the application has been approved, Navy Federal will contact the borrower to schedule a time for closing. In most cases, it will pay for many of the closing costs for the loan. But borrowers will need to pay the following costs:
- Credit report fee
- Government fees and recording charges
- Taxes (e.g., transfer taxes)
- Appraisal (if required)
- Title insurance (if required)
- Fees associated with condominium properties (if required)
The loan amount will then be dispersed on the fourth business day after the closing in order to satisfy the buyers’ 3-day right of rescission. It will usually take anywhere from 30 to 45 days after the borrower submits the application to receive the home loan.
Typical Interest Rates
Most home equity loans charge a percent or two more than first mortgages. Their rates are often tied to the Prime Rate, which is published daily in The Wall Street Journal. Other lenders may use the London Interbank Rate (LIBOR). The size and term of the loan will also play a role in the rate you receive, along with your credit score and credit report.
And the higher the loan-to-value ratio, the higher the interest rate will be. Home equity loans stand in contrast to home equity credit lines, which have a variable interest rate that is determined by the prevailing interest rate environment.
Pros & Cons
Navy Federal home equity loans can provide borrowers with many benefits. They are usually easier to get than first mortgages or cash-out refinances, and they can provide borrowers with the cash they need to pay for major expenses quickly.
Furthermore, the interest that is charged on any home equity loan that is used to buy, build or make major improvements on the borrower’s home is tax-deductible as long as the borrower is able to itemize deductions.
Another key benefit is that while the interest rate for a home equity loan will almost always be higher than the variable rate charged by a home equity line of credit, it will still probably be much lower than the rates charged by other types of loans such as credit cards, personal loans, student loans and auto loans. This makes them excellent vehicles for debt consolidation.
Probably the biggest disadvantage of home equity loans is the fact that the loan is secured by the home’s equity. This means that if the borrower becomes unable to make the monthly payments, then Navy Federal can foreclose on the home, leaving the borrower homeless. For this reason, borrowers should carefully analyze their budgets to make sure that they will be able to make this payment consistently.