You’ve put in the hard work to build equity in your home with each monthly mortgage payment. Now, it’s time to cash in and use that equity to cover any expense, ranging from home improvements and vacations to college tuition and medical bills. After doing the legwork to apply for a loan, provide financial documents, and wait for the underwriting process, it’s time to close in on your capital. Many homeowners tap into their home equity with a HELOC, which functions similarly to a credit card. It has a limit and a variable interest rate that determine how much you repay.
The closing process takes place over a scheduled day between the property owners and the lender. You will have to complete a few steps during this process to access your home’s equity. Understanding how the closing process works and what you’ll need can help you save time and get your capital sooner. You don’t want to go to a closing unprepared when you are so close to getting new capital.
How Do You Close a HELOC?
After the underwriting process, the lender will reach out and invite you to schedule a closing date and time. The lender will then arrange a meeting between their representatives and the property owners for the selected time. You will have to provide several documents and other information during the closing process to ensure it goes smoothly. While you can apply for a HELOC online without getting on the phone with a representative, you have to meet your lender at a local branch or through an online conference call.
How Long Does Closing on a HELOC Typically Take?
In most cases, the HELOC process takes 3-6 weeks, but it varies for each lender. Financial institutions and credit unions typically take longer, while you can get a HELOC faster with an online lender. You will have to get your finances organized and build your credit to increase your chances of getting approved and ending up with a lower interest rate. Homeowners will also have to submit the necessary paperwork and get someone to appraise the property. Some lenders use an automated valuation model that eliminates the need for an appraiser, but many financial institutions require an appraisal. The appraisal informs the lender on how much cash they can let you borrow based on the property’s equity.
What Happens During a HELOC Closing Process
The closing process is the final step to getting your home equity line of credit. With the finish line in sight, it’s important to stay focused to ensure no hiccups along the way. Here are some of the things you can expect during the closing process.
Bringing Your Identification and Other Documents
Homeowners must present their identification and other legal documents, such as their Social Security Cards. Identity theft has become a big issue, and lenders want to verify your identity before letting you borrow money. Most lenders provide a list of required documents so you can the closing can proceed without any issues.
Providing Homeowner’s Insurance and Inspection
Homeowner’s insurance is not a legal requirement, but if you want to get a mortgage or HELOC, you must get this insurance policy. Most banks, credit unions, and online lenders want to see your homeowner’s insurance policy before providing funds. You may also have to provide details about a property inspection if the lender didn’t use an automated valuation model. Lenders use home inspections to gauge their risk. The bank can take your home if you default on the loan, and an inspection helps the lender understand if they’re in for a project in the event you can’t pay off the loan.
Most banks, credit unions, and online lenders will work with you to prevent that scenario. For example, they may invite you to get a refinance to extend your loan and minimize monthly payments. Lenders also won’t take your home if you’re a few days late on your first payment.
Preparing Your Funds
Closings are exciting because you get the extra capital, but they are also expensive. Closing costs reflect the work that went into creating the loan and the legal services that finalize the agreement. You may have to pay 2% to 5% of the loan’s balance as closing costs. Gathering funds now will help you save money, but some banks may allow you to roll the closing costs into your loan. It’s better to avoid this option if you can since rolling over the closing costs also makes them subject to the loan’s interest rate. You will have to pay closing costs even if you never borrow against your home equity line of credit.
Reviewing and Signing of Paperwork
Make sure you double-check the paperwork before providing your signature. A homeowner should make sure the HELOC amount and interest rate match the amounts they agreed to earlier. If you agree to the terms, you must sign the paperwork to proceed to the next step.
Transferring of Title
A home equity line of credit places a lien on your home. This transfer means the bank, credit union, or online lender can legally obtain your home if you fall behind on loan payments. The lien will get removed once you repay the home equity line of credit and close your account.
What Else Can You Expect During Closing?
Nothing much will happen after you sign the paperwork and the title gets transferred. If you take out a HELOC on an investment property, you will receive the funds in your bank account shortly. Homeowners using their primary residence for the HELOC have three business days to think it over before receiving the funds. A homeowner can call off the HELOC within those three days if they experience a change of heart. They will receive the funds after that three-day period concludes.
Once you receive the funds, you can use the HELOC in any way you desire. Homeowners can invest in home improvement services, get a hotel reservation for their next getaway, or cover an emergency expense. HELOCs provide great flexibility, and you don’t pay interest until you borrow money against the credit line. This gives you more time to think over how you want to spend the money, and you don’t have to worry about borrowing too much cash. If you took out a higher HELOC than necessary, you can keep those funds in the line of credit and not worry about additional expenses.
