Is there a minimum amount for a home equity loan?

Home equity loans can be a great way to access some of the equity you hold in your home, but they may not be suitable for all circumstances. With this type of loan, you put your house up as collateral, which gives your lender rights to your house if you don’t repay the loan. This makes home equity loans a low-risk proposition for lenders, who can therefore offer extremely competitive interest rates, usually close to those of a regular mortgage.

Home equity loans have some disadvantages, however, even outside of the risk of losing your home. The first is that putting the lien on your home and offering a guaranteed interest rate for years to come makes lenders reluctant to issue small amounts through home equity loans. Many lenders have a minimum amount that they are willing to consider for this type of loan.

In this article, we’ll explain why and offer alternatives to a home equity loan.

  • Most lenders have minimum amounts that they are willing to lend via home equity loans.
  • Interest rates on these loans are usually quite low, and lenders may not make a profit on small loans that the borrower repays almost immediately.
  • Most lenders have a minimum of $35,000 for a home equity loan, although some will go as low as $10,000.
  • This minimum, along with potential prepayment penalties and up-front interest, makes home equity loans unsuitable for small loans. If you need a loan less than the minimum equity loan available, you may consider borrowing by credit card or applying for a personal loan.

Minimum amounts for home equity loans?

Each lender sets their own eligibility requirements and processes for home equity loans. However, there are fairly standard features in the industry. The first is that you own a significant portion of the equity in your home, normally at least 15% of its value. Second, you may have to pay many of the same closing costs associated with a first mortgage, such as loan processing fees, origination fees, appraisal fees, and registration fees. Although these fees vary from lender to lender, they can add up to a few thousand dollars.

These two factors combined make home equity lenders wary of issuing small home equity loans. Among the major banks, the minimum in April 2022 was $10,000, with a maximum combined loan-to-value ratio of 80%. But some lenders expect a minimum loan of $35,000 and even lower loan-to-value ratios.

This minimum has two effects. The first is that it is difficult for some homeowners, and especially those who do not yet have significant equity, to access a home equity loan. The other is that some borrowers who only need a small cash injection end up borrowing far more than they need relative to the value of their home. And since some home equity loans also have prepayment penalties or upfront interest payments, it may not be possible to take out a larger loan and pay off the unnecessary portion.

Some home equity loans have prepayment penalties, which are fees you have to pay if you pay off the loan before it’s due. These fees impose a minimum cost for a home equity loan, even if you only need to use some of the money.

Alternatives to a home equity loan

The minimum size of home equity loans can make them unsuitable for short-term borrowing for small purchases or projects. You will pay interest on a home equity loan, and the minimum size of these loans also imposes a minimum amount of interest.

There are a few alternatives to home equity loans. If you need access to credit in the very short term (a few months maximum), you can use a credit card. However, credit card interest rates are so high that it can be expensive to borrow, even if you don’t do much.

Another option is a personal loan. Although personal loans may look like a home equity loan, there are important differences between these types of borrowing. Personal loans are unsecured, which means the loan is not based on collateral, like a house. Some lenders offer personal loans with no origination fees, but even if they do, they won’t be as high as home equity loan closing fees, which can cost several thousand dollars for larger loans. You will also be able to arrange a personal loan much faster than a home equity loan.

Is there a minimum amount for a home equity loan?

Yes. Some lenders set a minimum of $35,000; others can go as low as $10,000.

Can I pay off a home equity loan sooner?

You can, but you may have to pay a fee. Some home equity loans have prepayment penalties or upfront interest payments that set an effective minimum cost for the loan, even if you only need to use part of it.

Are there alternatives to a home equity loan?

Yes. If you need to borrow a small amount for a very short period, you may consider using a credit card. Alternatively, you can apply for a personal loan, which is less risky than a home equity loan and much more flexible.

The essential

Most lenders have minimum amounts that they are willing to lend via home equity loans. Interest rates on these loans are usually quite low, and lenders may not make a profit on small loans that the borrower repays almost immediately. Most lenders have a minimum of $35,000 for a home equity loan, although some will go as low as $10,000.

This minimum, along with potential prepayment penalties and up-front interest, makes home equity loans unsuitable for small loans. If you need a loan less than the minimum equity loan available, you may consider borrowing by credit card or applying for a personal loan.

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