What is a USAA Home Equity Loan?
If you need a large sum of cash to pay for a single expense, such as a medical bill or a new car, then you should consider taking out a USAA home equity loan. This type of home loan is secured by the equity in the borrower’s home and can be used for any purpose that the borrower needs. Read on to find out more about home equity loans and how they can benefit you.
How Home Equity Loans Work
Home equity loans are secured by the equity in the borrower’s home (or second home, or investment property in some instances). Home equity loans are simpler vehicles than a home equity line of credit.
While HELOCs can be drawn from and repaid over and over during the draw period, home equity loans simply disperse the entire loan amount to the borrower up front in one lump sum. They are essentially second fixed-rate mortgages that are similar in structure and terms to primary mortgage loans.
Home equity loans are mortgage products offered by banks, credit unions and other financial institutions. In most cases, borrowers who have other types of accounts open with the lender can qualify for rate discounts.
They charge fixed rates of interest for a fixed term, such as 10, 20 or 30 years. The payments are fixed as well as the interest rate, and they cannot change once payments begin. There is no draw period or repayment period with home equity loans; the borrower begins paying interest on the entire loan amount at the outset and continues to do so until the loan is paid off.
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.
Most home equity lenders will cap the amount they loan at a loan-to-value ratio of 80 to 85 percent, although there are some lenders that will go as high as 90 or even 100 percent. The amount of the loan is calculated by multiplying the value of the home by the maximum loan-to-value ratio and then subtracting the first mortgage and any other liens on the property.
The remainder is the loan amount that the lender will extend to the borrower.
It should be noted that while USAA is a leader in the VA loan and FHA loan markets for military members and their families, they currently do not offer home equity loans or home equity lines of credit of any kind.
Qualification & Requirements for Home Equity Loans
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 the lender 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, the lender 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. The lender 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, the lender will contact the borrower to schedule a time for closing. In most cases, the lender will pay for some or all of the closing costs for the loan. The loan amount will then be dispersed at the closing table. There may also be an origination fee added to the loan balance.
Typical Interest Rates
Unlike home equity lines of credit, which are adjustable-rate mortgages, home equity loans charge a fixed rate of interest. This rate is usually tied to a major financial index such as the Prime Rate Index, which is published every day in The Wall Street Journal. However, the interest rates for home equity loans are usually higher than for home equity lines of credit (at least initially).
Most home equity loans will charge an additional amount of interest on top of the Prime Rate. The additional amount will vary according to the borrower’s credit score, the size of the loan, the home value and other assorted factors.
Each payment with a home equity loan will go towards both interest and principal. Home equity loans are amortizing loans.
Pros & Cons
Probably the biggest benefit that home equity loans offer is their flexibility. They can be used to pay for any type of expense, including:
- Medical and dental bills
- College tuition and other educational expenses
- Monthly expenses if the borrower becomes disabled
- An emergency savings fund
- Automotive expenses
- Home improvements
- Debt consolidation
Furthermore, the interest that is charged on any home equity loan that is used to buy, build or substantially improve the home against which the loan is taken can be tax-deductible, provided that the borrower is able to itemize their deductions. However, the interest charged on home equity loans that are used for any other purpose is nondeductible.
Whether the interest is deductible or not, the interest rates charged by home equity loans are still usually going to be much lower than what other loan types such as credit cards or personal loans charge. This makes them ideal vehicles for loan consolidations.
The fixed interest rate charged by home equity loans can be either an advantage or a disadvantage, depending upon the prevailing interest rate environment. If mortgage rates are rising, then locking in a fixed rate can be an advantage. The borrower may end up paying a lower rate over time this way.
On the other hand, if mortgage rates are dropping, then locking in a fixed interest rate may be disadvantageous, since the borrower could end up paying a higher rate than what other loans charge, especially those that have adjustable rates. But in any case, the borrower will at least always know how much money they have to come up with every month in order to make their payment.
Home equity loans also do not require any kind of down payment such as with a car loan. But other loans such as USAA mortgages may require this. Getting a home equity loan is also usually easier than doing a cash-out refinance. And no mortgage interest is needed for home equity loans.
Of course, the biggest disadvantage of a home equity loan is that if the borrower becomes unable to make the monthly payments, then the mortgage lender can foreclose on their home. For this reason, borrowers need to carefully consider whether they will be able to make this additional payment every month for the life of the loan.