How to Evaluate Fintech Home Equity Products
You can evaluate a fintech’s home equity offerings by comparing interest rates, terms, and any additional perks.
If you’re in the market for a home equity product such as a home equity loan or home equity line of credit (HELOC), you may turn to your bank or credit union. However, a growing number of fintech companies are also offering these products.
A fintech, or financial technology company, operates primarily online and uses advanced technology that enables a digitized lending process. As a result, fintechs can often offer a faster approval process and potentially better terms for the loans.
Learn more about how home equity products work and how to evaluate a fintech’s home equity offerings.
Key Takeaways
- A fintech company, or financial technology company, operates primarily online and uses advanced technology for underwriting.
- Fintechs are increasingly offering home equity products like loans, lines of credit, or shared-appreciation arrangements.
- Home equity products use your home equity as collateral for a loan or revolving line of credit.
- Shared-appreciation arrangements allow homeowners to secure a lower rate in exchange for a portion of any increased home value to the lender.
Home equity loans can often offer a more affordable way to access cash for major expenses like home repairs or college tuition. Their interest rates are typically much lower than the rates on personal loans and other loan products. Many people also use home equity loans or HELOCs to pay off higher-interest debt such as high credit card balances.
Homeowners with significant equity may also use a home equity product to help fund their living expenses in retirement. This practice is called a reverse mortgage, since the owners start the reverse process of receiving payments periodically against the value accumulated in their home over time and that they might not need for so long since they are aging.
Types of Home Equity Products
When you evaluate products from a fintech, you’ll want to understand the differences in how they work.
With a home equity loan, the lender provides a lump-sum amount that you can use for any purpose. The loan amount you can be approved for will depend on how much equity you have in your home, with many lenders capping loans at about 80% combined loan-to-value (CLTV) ratio, meaning you can usually only use a part of your equity. You repay a home equity loan in regular payments with a fixed interest rate.
Home equity lines of credit (HELOCs) work more like a credit card. Homeowners receive a line of credit that they can access as they need, and the interest rates are usually variable.
With both loans and lines of credit, the lender is repaid in full if the homeowner sells their property.
Some lending companies, including fintechs, also offer shared-appreciation arrangements. Shared-appreciation financial products allow homeowners to get a lower interest rate in exchange for giving the lender a percentage of the increase in value, or appreciation, of the home if it’s sold.
How to Compare Home Equity Products
When you evaluate home equity products from a fintech company, you’ll want to take into account their terms and interest rates as well as how they compare to similar products from traditional lenders. For example, a fintech may offer a fixed interest rate on HELOCs, whereas traditional lenders typically offer variable rates. A fintech might charge minimal up-front fees because its process is digital and not costly, while traditional lenders might charge higher up-front fees since their process is manpower intensive.
Equity Requirements
Some fintech companies may accept more of your home equity as collateral than others. Many companies don’t accept a 100% CLTV, but you could potentially use up more of your home’s value with some products than others. More commonly, you will be be approved for a loan-to-value (LTV) ratio of 80% of less.
A combined loan-to-value (CLTV) ratio is the ratio of the total amount of secured loans on a property compared to the property’s value. The lower the CLTV, the lower the risk to the lender.
You may also face minimum equity requirements, such as needing at least 20% equity in your home. Each fintech will set its specific minimum equity requirements.
Interest Rates
Interest rates on home equity products will vary from lender to lender. The lower your interest rate, the more you will save in total loan costs. So, compare interest rate offerings among several fintechs to determine which is most affordable. This means getting the lowest fixed rate over comparable lending periods. Some fintechs might have a more efficient underwriting process, different risk management through access of data, or cheaper cost of capital that they can pass on to you in the form of lower interest rates. And there might be other factors to consider with interest rates as well.
Some home equity products have fixed interest rates, which are more predictable. Others have variable interest rates, which could potentially be lower but could rise over time. Consider your current interest rate environment and your personal financial situation when you evaluate which type of interest rates may work best for you.
Length of Loan
Repayment terms for home equity loans and HELOCs will also vary.
With home equity loans, term lengths can range from five to 30 years. You’ll make regular payments to the lender during that time.
With a HELOC, the fintech will extend a line of credit to you for a set period of time called the draw period. Then your repayment period will begin, and you will begin making regular payments, typically with variable interest rates.
Other Terms
As technology companies, fintechs often offer innovative products, including with their home equity loans. For example, lenders like Synergy One Lending and Figure offer a HELOC that is powered by blockchain technology to provide a more efficient process for the application, underwriting, and funding. By using blockchain and other technology, fintechs can make loan origination significantly more affordable.
Finally, be sure to evaluate the different fees associated with various fintech home equity products. A home equity loan or HELOC may have a competitive interest rate, but higher closing costs. Many home equity loans or HELOCs come with closing costs of 2% to 5%.
How does a home equity loan work?
A home equity loan is a loan for a set amount of money, repaid over a set period of time that uses the equity you have in your home as collateral for the loan. If you are unable to pay the loan back, you may lose your home to foreclosure.
What is a fintech mortgage company?
A fintech mortgage company is a lender that uses financial technology to process, approve, and fund a mortgage. Technology-based lenders process loans significantly faster than traditional lenders.
What is a blockchain HELOC?
A blockchain home equity line of credit (blockchain HELOC) uses your home as collateral and uses blockchain to store and transmit records in the application process. Using blockchain to verify data can make the approval and underwriting process much faster.
How much equity can I cash out?
Lenders impose limits on the amount that you can borrow with a home equity loan or HELOC. Generally, your combined loan-to-value (CLTV) ratio needs to be 80% or less, meaning that the total loans using your home as collateral must be no more than 80% of your home’s value.
What is the difference between a home equity loan and a shared-appreciation mortgage?
A home equity loan is debt financing. The borrower gets a sum of money and must repay it, plus interest. The lender may have a lien, or claim to the property, but receives only the principal plus interest as in any other loan. In a shared-appreciation arrangement, the lender receives part of the increased value of the home at some point in the future.
The Bottom Line
Fintech lenders can provide competitive home equity products like loans and lines of credit that may fit your financial needs. Review all your options in home equity loans, comparing the pros and cons and different terms. Consider consulting a professional financial advisor for guidance on the best home equity product for your particular situation.