A home equity loan can be one way to access cash for home improvements, vacation, debt consolidation, or any other financial need you may face. Your home equity loan allows you to borrow against the equity in your home and pay it back over a long period of time with a low interest rate.
The application process, however, can be as cumbersome as the mortgage lending process. In addition, closing costs can vary from around 2 percent to 5 percent of the loan amount. Since there is so much work involved in the origination process, lenders often set a minimum amount for a home equity loan.
How Small of a Home Equity Loan Can You Get?
General lending practices and regulations do not set a minimum balance for a home equity loan. The amount you can borrow is dependent upon the current market value of your home and the outstanding balance on your existing mortgage.
The total balance of your mortgage together with the balance on your home equity loan cannot exceed around 80 percent to 85 percent of your home’s value. This is called the combined loan-to-value ratio. If you have a relatively small balance on your existing mortgage, you’ll be able to get a larger home equity loan. If you still owe a lot on your existing mortgage, you may only be eligible for a small home equity loan.
On the other hand, many lenders do have a minimum amount they are willing to consider giving a borrower with a home equity loan. The closing costs that you pay do not reimburse the lender for all of the costs incurred while processing your loan application and underwriting your home equity loan. A lender views your home equity loan as an investment so large home equity loans are preferred.
Lenders incur costs up front that they earn back along with a required rate of return over the loan term. If you only borrow a small amount, the lender may never earn back the expenses incurred to originate the home equity loan. As a result, individual lenders set minimum loan amounts on home equity products that can range from $10,000 to $35,000.
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Is a Home Equity Loan a Good Option for a Small Amount of Financing?
If you only need to borrow a small amount of money, it might be better to consider alternatives to the home equity loan. Credit cards are the most obvious solution for small, short-term financing needs. You don’t have a lengthy application process and can use the credit in any way that you want. The interest rates on credit cards, however, are very high. So, this is not the best option if you can’t pay back the balance within a few months.
Personal loans can be a good way to get a smaller amount of money for a short period of time. You can apply online and often receive the funds within one day. The application process for a personal loan is much quicker and easier than it is for a home equity loan.
Lenders may provide personal loans for amounts starting at around $500 to $1,000. The interest rate on a personal loan is higher than it is for a home equity loan because it is an unsecured loan. Interest rates are still much lower than they would be on a credit card, though. Personal loans usually have terms of around two to seven years.
What Are the Risks of Using a Small Home Equity Loan?
The main risk of using a small home equity loan is the risk to your home. The reason you can borrow money at a low interest rate is that your home serves as collateral for the loan.
If you do not make the payments on your home equity loan, the lender can foreclose against your home in order to meet your debt obligation. In addition to the other concerns about getting a small home equity loan, you should consider whether it is worth putting your home at risk for the money you receive.