Is it possible to get a short term home equity loan? In this guide, we discuss the most important details about home equity loans and if short term home equity loans really exist. You might be surprised at the answer. 

What are home equity loans?

Home equity loans are a type of secured loan that uses your home equity as collateral in case you fail to repay. To fully understand what home equity loans are, you need to first understand how home equity works.

Home equity is a way of saying how much value you own in your home outright. For example, if you have already paid off your mortgage without any other debts owed on your home, your home equity would be the same as the property’s value. Alternatively, you work out your home equity by subtracting your existing mortgage balance away from your home’s current market value. 

By using the home equity as security within the loan, the lender will usually allow you to borrow up to a maximum of 85% of this amount. For people with a lot of home equity, this allows them to access a big loan if needed. For example, having £100,000 home equity could get you an £85,000 loan – much more than what is available through personal loan providers. 

Don’t confide a home equity loan with a home equity line of credit (HELOC). You can read about the differences here

The pros and cons of home equity loans

Home equity loans have benefits and drawbacks like any other loan product. They can be summarised as:

The pros:

  1. You can access a larger loan than most other credit options, such as credit cards and unsecured personal loans.
  2. These loans can be used for an array of purposes and are not restricted. Some of the most common are home renovations and debt consolidation
  3. Home equity loans have a competitive interest rate, however, this will depend on your credit score. Because you are using your home equity as collateral, lenders can lend to you with lower rates on average. 
  4. Most of the time they have a fixed interest rate, which helps you budget accurately for repayments. 

The cons:

  1. Using a home equity loan risks losing your house. Failure to repay as agreed means the lender can initiate foreclosure. This is a process where you are forced to sell your home. Once sold, any money raised is used to pay back the principal and interest owed on the loan in full. 
  2. There may be additional fees to consider when using one for these loans, most notably closing costs. We discuss these later in our guide. 
  3. If your home goes down in value while repaying the loan you could end up in negative equity, i.e., you owe more than what the property is currently worth. 

What is the smallest home equity loan?

Lenders will usually cap the maximum amount of money you can borrow against your home equity, but there is not always a minimum home equity loan you can take out. Some lenders might add in loan amount restrictions, such as borrowing a minimum of £10,000 in the loan. In these cases, you will require more than £10,000 home equity to take out a home equity loan.  

The maximum home equity loan amount uses a loan to value ratio around 80-85% as part of responsible lending. This means you can only borrow against 80-85% of your equity – not 80-85% of your home’s value! 

Can you get a home equity loan for 5 years?

Because home equity loans are usually for large sums of money, the repayment periods can last as many as 25 years, similar to the repayment period on a mortgage. However, some smaller home equity loans or people with significant incomes can get a home equity loan that is repaid in as little as five years.

Can you get short term home equity loans?

Short term home equity loans do exist but due to minimum loan amounts (as much as £10,000) then a short term home equity loan is usually repaid over a longer timeframe than a short term personal loan for smaller amounts. 

Most short term equity loans have a repayment period of around five years, whereas short term personal loans are repaid within a few weeks up to six months. So, they are short term loans but not how you may be used to. 

Why choose a short term home equity loan?

Choosing a short term home equity loan offers the same benefits as choosing any other home equity loan, namely:

  1. Access to large credit (depending on affordability checks)
  2. Lower interest rates than alternative options
  3. A fixed interest rate that’s easy to budget for

Another benefit of choosing to repay quicker is that it might get you an even lower interest rate. However, lenders may not offer such a short repayment period if they think it will not be affordable to you. 

What is the downside of a home equity loan?

One major downside of a home equity loan is if you are subject to closing costs. These are additional fees paid at the end of the loan term and are also found on some home loans and mortgages. 

Closing costs are usually calculated based on the loan amount you took out and can be between 2% and 5% of that amount. For example, taking out a £50,000 home equity loan could include closing costs of £1,000 to £2,500. 

Short term home equity loans for smaller amounts may also be subject to closing costs, but because these short-term loans are typically for smaller amounts, then the closing costs may not be as eye-watering. 

Can you get a home equity loan without closing costs?

Some home equity loans – including short-term equity loans – are advertised without closing costs. However, the lender may have increased the interest rates offered meaning any savings are negligible or non-existent. It’s best to search the market and make accurate comparisons. 

Alternatives to short term home equity loans

Alternative options include:

  1. Short-term unsecured personal loans
  2. Short-term secured personal loans
  3. Credit cards (especially with a 0% APR introductory offer)
  4. Short-term homeowner loans

More short term home equity loan info

If you need more information on home equity and the different credit options available – short or long term – you can find clear and helpful information with MoneyNerd! 

We’ve just posted hundreds of new blogs and guides that simply explain these products and what they can provide homeowners. Read about them now or check back soon!

About the author

Scott Nelson

Scott Nelson is a financial services expert, with over 10 years’ experience in the industry, including 6 years in FCA regulated companies. Read more
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