By Chris Meade
When a borrower comes to your institution seeking funds, most often aren’t arriving with a specific type of loan in mind. They have a need and look to their lender for guidance about the best way to address it. Personal loans are often the go-to option for lenders. They are often the fastest, easiest way to get a borrower access to funds. But, technology is changing the ease of home equity lending, and we think it deserves a more frequent look.
Home Equity Loans are Becoming Faster and Simpler
In a pros and cons comparison of personal loans vs. home equity loans, the “cons” of home equity loans include a (much) longer process with more hoops to jump through. It’s a fair critique. Many institutions average four weeks or even longer to close.In that light, the personal loan might seem the obvious choice. But what if the borrower doesn’t have stellar credit? What if they need a large amount of cash to fund a longer project that could require multiple draws? What if an automated lending workflow could intelligently execute the home equity loan process for you? What if you could be cleared to close on a HELOC in as little as three days? That certainly changes things, doesn’t it? Lenders that digitize and automate their back-end processes can radically change the traditional expectations around home equity lending. With a simple click that launches an advanced automated workflow, lenders can slash timelines like they never thought possible. And, it’s not just about doing everything faster. It’s about working much, much smarter. Using an automated workflow means that upon clicking “start,” the loan process is intelligently carried out utilizing an efficient set of best practices. You can do other, more productive things that don’t include duplicate data entry and checking on appraisal status. What about offering borrowers more financial guidance, or identifying other product offerings that fit their needs?
Home Equity Loans Can Save Borrowers Long-Term
Borrowers that need a substantial sum of money or are embarking on a new, long-term project should be encouraged to look at home equity lending options that may save them significantly in the long run. Those that don’t possess a top-tier credit score but do have equity in their homes may actually find it easier to qualify for a home equity loan since it is secured with collateral.Home equity loan interest rates are substantially less. The range can be five percentage points or much greater, based on a borrower’s credit score. Those with lower scores may find personal loans to be on par with credit card interest rates. The interest savings offered by home equity loans can really make a difference over time.And, there’s another distinct interest rate benefit that personal loans can’t offer: potential tax advantages. Borrowers using a home equity loan to improve their home may be able to deduct the interest from the loan if they itemize deductions on their tax return. Total mortgage debt must be under the threshold of $750,000 t0 $1,000,000.
Home Equity Loans Better Protect Lenders
We established above that with helpful technology, home equity loans can be made without demanding the staff time and resources as in the past. With that problem dispensed, there becomes a more clear advantage for lenders when it comes to managing risk. If finances become troubled, borrowers are least likely to repay a personal loan. Since there is no asset to repossess or credit line to revoke, the default rates tend to be higher than other types of loans. Recent history points to borrowers working harder to remain in good standing on home loans. When the pandemic strained the finances of many Americans, they prioritized mortgage payments over other forms of debt. Particularly as home prices rise, borrowers will more naturally work to preserve and protect their largest asset.
The Bottom Line
Gone are the days when lenders had to wonder if a home equity loan was worth the time and effort for the borrower or the institution. When powered by fast and efficient technology, home equity lending can be a true win-win for both parties.