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Rising interest rates on mortgages and refinancing loans are causing homeowners to think twice about tapping into the equity in their homes. But home values and equity have skyrocketed — Home equity loans offer the best alternative to rising interest rate refinancing. You can keep your current low mortgage rate and access equity using a home equity loan.

How to tap into home equity

Your home is one of the most significant investments you’ll make. The equity value increases as you pay off your mortgage and real estate prices rise. But it doesn’t need to stay tied up in your house. If you want to access the equity in your home, you can. Instead of taking out a personal loan or using a credit card, you can trade your home’s equity for cash at a lower interest rate. You generally have two options:

Refinance

A refinance replaces your original mortgage with a new, larger loan. The new loan comprises your existing mortgage balance and home equity that you’ve built up. You can “cash out” the difference between your home’s market value and what you owe, effectively trading your home equity for cash.
However, increasing interest rates make refinancing a costly option.

Home equity loan

A home equity loan leaves your existing mortgage as-is. Instead, you take out a loan for the equity only. You borrow a lump sum and repay it as a separate monthly payment in addition to your regular mortgage payments. Home equity loans are the best alternative to access your equity when interest rates increase.

How interest rates impact your options

Interest is the cost of borrowing money. When interest rates go up, loans become more expensive. With the increases already seen in 2021, combined with the coming changes in 2022, homeowners can expect to see a significant rise in interest rates.
The rising interest rate makes refinancing your home to take out equity costly — making it even more important to consider your options when choosing how to tap into your home equity.

Why home equity loans are the best choice

If you take out home equity with a refinance, you could end up with a much higher interest rate. And higher interest rates mean you’ll pay a lot more to repay the loan. That’s why home equity loans are the best choice to access your equity — you can keep your current mortgage with its low interest rate. For example, suppose your house is worth $500,000, and you have $400,000 left to pay on a 30-year mortgage with a 3% interest rate. To tap into the $100,000 in equity, you can refinance at the current market rate of 4.75% or take out a home equity loan for 5%.At first glance, you’d think the refinance is the better option because it has a lower interest rate.

But consider this: If you opt for a 15-year refinance the full $500,000 at 4.75%, you’ll end up paying $200,062 in interest fees. But with a $100,000 home equity loan that you repay over 15 years, you’ll only pay $3,366 in interest — a savings of $196,696 over the live of the loan.

Access equity while keeping your low mortgage interest rate

A home equity loan is a strategic option to access your home equity. Compared to refinancing, it’s a cheaper alternative when interest rates increase.

Keep your current low mortgage rate and get a home equity loan from Button Finance. The application is quick and easy, and you can get your funds in just ten days. Apply with Button Finance today!

One of the most disruptive industries to emerge in recent years has been the rise of fintech. These changes will inevitably transform how financial transactions are conducted and revolutionize how banks operate. Companies like Button Finance, a fintech digital lender, are leading this revolution.

Fintech is not just about digital payments or smart banking solutions. It also keeps pace with people’s needs by bringing financial innovation to new levels. As traditional financial institutions adapt to this brave new digital world, new technologies will force them to adapt or die off altogether.

Here’s how fintech will change traditional finance, and how Button Finance is leading the way to fill the gap.

Will digital assets replace traditional counterparts?

Even though fintech is disrupting banking, most assets of any consequence are still physical, including checking and savings accounts, loans, and mortgages.

The rise of cryptocurrency and other digital assets may lead you to believe that fiat currency will soon be dead. While digital assets aren’t poised to replace their traditional counterparts anytime soon, technological advances are changing the game — and Button Finance is a key player.

Button Finance is using technology and smart underwriting to change home equity loans. The company integrates artificial intelligence (AI) into its underwriting platform to serve traditionally under-banked borrowers and allow them to tap into the value of their homes.

How traditional lenders are working with fintech players

Financial institutions are looking beyond conventional solutions to meet customers’ needs in new and better ways. Many examples of successful partnerships exist — Home Depot partners with GreenSky, Ally Bank partners with Better Mortgage, and JP Morgan Chase was once partnered with Ondeck Capital.

Traditional lenders are partnering with fintech players to leverage new financial technology. For example, they’re looking to fintech to:

- - - Revamp customer acquisition practices to emphasize digital communication, including utilizing social media advertising
    - Streamline online applications for most products and account openings
    - Develop native apps that enable customers to access bank accounts, make deposits and transfers, pay bills, and manage finances
    - Using digital interactions whenever possible to increase the focus on better and easier access to customer service
    - Deploy cloud-based systems to replace legacy infrastructure

By partnering with fintech, lenders can use social, mobile, analytics, AI, and IoT (internet of things) to create new opportunities and business strategies.

What is the most susceptible part of the ecosystem?

Legacy systems that previously fueled growth have reached a maturity point. As fintech disrupts traditional business methods, a few areas stand out as the most vulnerable.

Traditional institutions that rely on brick-and-mortar storefronts are susceptible. Because they lack a digital presence, their range of offerings and number of customers may not grow as quickly — the fintech model increases customer acquisition rates at a lower cost than traditional banking.

Fintech threatens financial institutions that limit their offerings to low-value financial services and products. Checking accounts, savings accounts, and credit cards are commodity products.

Perhaps the most susceptible part of the ecosystem is any business that doesn’t persistently focus on the customer experience. Studies indicate that about 97% of customers share their very good or excellent customer service experience, which is crucial for customer expansion. Additionally, nearly 70% of customers would spend more money with a company based solely on their excellent customer service.

Button Finance focuses obsessively on improving the customer experience by reducing friction in the application process and providing near-instant credit decisions. The technology and underwriting process is designed for American homeowners traditionally underserved by banking products. Now, homeowners can achieve financial independence by accessing their home equity to pay down high-interest debt and make value-enhancing renovations.

Fintech automation and the roles it threatens

The roles that lend themselves most to automation are those for which human intervention is only necessary in exceptional cases. Think of a teller counting bills at a bank. Machines can count bills better and faster than humans, so no one would argue against automating that process.

Other roles threatened by fintech include:

- - - Underwriting: Determining the risk of lending to a particular borrower is currently an unsophisticated process where bankers rely on outdated metrics with limited legitimacy to risk assessment. Machine learning and AI have fundamentally transformed how credit decisions are made today. These technologies enable companies like Button Finance to provide near-instant approvals with minimal manual intervention.
    - KYC and customer validations: Knowing your customer (KYC) and verifying customers are crucial to preventing fraudulent behavior and ensuring client integrity.
    - Customer communication: The entire borrower communication process is antiquated —borrowers want to get on the phone with a “real” person. Still, the process is non-intuitive and not easy for borrowers to navigate.

There’s no doubt that fintech will change banking and disrupt traditional finance. By marrying the latest in technology with traditional finance, fintech can help banking and lending change for the better — and that’s our goal at Button Finance.

At Button Finance, we’re obsessive about delivering the best customer experience, and we’re leveraging technology to make it happen.

A Home Equity Loan (HELOAN) or a Home Equity Line of Credit (HELOC) are great options for homeowners who wish to borrow money. Homeowners can tap into the equity in their homes and get larger loans at lower interest rates than comparable personal loans. Borrowers can use these funds for various purposes like home improvement or to pay off other high-interest debt like credit card or personal loan debt.

How can borrowers ensure that they can qualify for a HELOAN or a HELOC? To determine whether you are eligible for a home equity loan, lenders look at a few key numbers. There are some simple requirements that borrowers can familiarize themselves with to qualify for a home equity loan.

1. Home Equity

Home Equity is the most useful measure to determine if you are eligible for a Home Equity Loan. A positive home equity amount will allow you to borrow against your home. The amount of home equity will be used to calculate the size of the loan that you may be eligible for.

Home equity is calculated as: (value of the home) – (unpaid mortgage amount)

The easiest way to calculate your home equity is to estimate the value of your home and then subtract your unpaid mortgage amount. E.g. if your home is worth $500k and your mortgage has been paid down from $400k to $350K, your home equity is $500k – $350k = $150k.

Your home price may have changed since you purchased it. Websites like Zillow and Trulia can provide a more up-to-date estimate of the value of your home. Lenders may require an appraisal of your home to determine the most accurate home value. You will need to have positive home equity to be eligible for a HELOAN or a HELOC.

2. Combined Loan-to-Value Ratio

Combined Loan-to-Value Ratio, also known as (CLTV), is one of the most important numbers that a lender will look at before extending a HELOAN. CLTV is equal to the sum of your unpaid mortgage amount and your potential HELOAN, divided by the value of your home.

CLTV is calculated as: (unpaid mortgage amount + HELOAN) / (value of home)

In our example, if the borrower were to take a HELOAN of $100k, his CLTV would be ($350k + $100k) / $500k = 90%.

Lenders usually target CLTVs of between 60% and 100%, although bank lenders would rarely exceed CLTVs of 85%. Newer lenders like Button Finance can help you avail of larger loans of up to 97% CLTV.

3. Debt-to-Income Ratio

Another important consideration is your debt-to-income ratio. A debt-to-income ratio, also known as DTI, is simply the sum of your principal and interest payments divided by your income. Payments include those made on your current mortgage, credit cards, car loans among others.

You should calculate your total monthly payments on all your loans and then divide them by your monthly salary. E.g. if your monthly debt payments are $1,500 and your monthly salary is $5,000, your DTI is $1,500 / $5,000 = 30%.

You can usually include your spouse’s salary in your DTI calculations. Most couples apply for HELOANs together, so including your spouse’s salary will help reduce your DTI.

The lender will calculate a new DTI after including monthly payments for your HELOAN. In this example, if the monthly payments on your HELOAN is $500, your new DTI will be ($1,500 + $500) / $5,000 = 40%.

You should aim to maintain your total DTI after including payments on the HELOAN below 50%. Most lenders will not approve borrowers with DTIs above 40%. Button Finance will allow you to borrow with payments of up to 50% DTI for larger loan sizes.

4. Credit Score

Lenders will also look at your credit score before extending a loan. A good credit score will certainly ease your path to getting a HELOAN.

You can request to see your credit report for free by contacting credit bureaus like Equifax, Experian, and TransUnion. You should check your credit report to ensure that there are no errors and that your credit score is correct. In case of an error on your credit report, you should contact the credit bureau to have them fix it before you apply for a HELOAN.

Most banks will only lend to borrowers who have credit scores above 720. Button Finance aims to lend to borrowers with credit scores above 640.

5. Other Factors to Consider

Some other things to keep in mind before applying for a HELOAN are that lenders will require you to provide documents to prove your homeownership, mortgage, and income. You should have documents showing the title to your home, mortgage deed, home insurance along with your W2s, pay stubs, and tax records.

It is also important to check your credit report for bankruptcies and recent delinquencies among other things and to correct them if they are erroneously reported. Lenders will also look for any other significant expenses that you may have and employment history to determine the stability of your income.

A Fresh Way to Borrow against your Home Equity

If you are considering a Home Equity Loan or Line of Credit, why not look at Button Finance. Button Finance is launching soon – a smart, seamless and convenient way to borrow. Button Finance’s Home Equity Loans will feature an easy, digital application process and quick approval. Unlike traditional lenders, Button Finance will approve qualified applications in a short period of time and you can receive your funds in as soon as 5 days!

Your home is your biggest asset. A Home Equity Loan (HELOAN) puts your home to work for you.

A HELOAN allows you to borrow money by using your home as collateral. A HELOAN is sometimes called a second mortgage as you can use the equity in your home – the value of your home less your mortgage amount – to borrow money. HELOANs can be used for a variety of purposes like home improvement, debt consolidation or paying for education or medical expenses. The interest rates on HELOANs are usually lower than those on other types of personal loans and the interest paid can be tax-deductible*. Let us look at an example of a HELOAN.

Example HELOAN

A HELOAN typically allows you to borrow up to the value of your home less your mortgage amount. If your home is worth $500,000 and your mortgage amount is $350,000, a HELOAN can let you borrow up to $150,000.

All the funds, in this case, $150,000, are available as soon as the loan is approved. The loan is paid down over time, usually between 5 and 30 years.

The interest rates on HELOANs depend on the size of the loan and the loan-to-value ratio. In this case, the loan-to-value (LTV) ratio is 100% as the borrower would like to withdraw their entire equity. Usually, the higher the LTV, the higher is the interest rate charged.

Let’s assume an interest rate of 10% and a loan term of 10 years. The borrower would make monthly payments for this loan of roughly $1,982 for 10 years.

Using Loan Funds

You can use your HELOAN funds for any purpose that you desire. Most borrowers use them for big expenses like:

i. Home Remodeling or Renovation – enhance the value of your home

ii. Debt Consolidation – reduce monthly payments by paying off the high-interest credit card and personal loan debt

iii. Education Expenses – pay for kids’ college or pay off student loans

iv. Healthcare or Medical Expenses – take care of family members

v. Create a Rainy-Day Fund – emergency funds to pay for life’s surprises

Advantages of Home Equity Loans (HELOANs)

HELOANs offer many advantages over other personal loans making them a superior option when borrowing money.

a. HELOANs are the Simplest Way to Borrow Against Home Equity – HELOANs are simple and straight-forward loans. Unlike HELOCs which have confusing draw terms and variable interest rates, HELOANs give you access to the entire loan amount at once and have fixed interest rates.

b. HELOANs are Cheaper – HELOANs usually offer lower interest rates and lower monthly payments than credit cards and personal loans. Using your home as collateral lowers the interest rate charged.

c. HELOANS Offer Larger Loan Sizes – The amount of money that you can borrow is usually only limited by your home equity. The loan amount is usually significantly higher than that on personal loans or credit cards.

d. Interest Payments are Tax-Deductible* – You could save money on your taxes by deducting the interest paid on a HELOAN. This deduction can lower your monthly payments further. Interest paid on credit cards or personal loans is not tax-deductible.

Disadvantages of Home Equity Loans (HELOANs)

HELOANs have some drawbacks that may not make them the best option for all borrowers.

a. Your Home is Collateral – HELOANs allow for cheaper borrowing because your home acts as security for the loan. Under extreme circumstances, if you are not able to repay the loan, your home could be foreclosed to recover the loan amount.

b. Tax Deduction May Not Apply – Tax deductions depend on various factors and do not apply to all borrowers equally. Depending on your income, state of residence, and mortgage interest you may be unable to receive any tax savings.

*Tax deductions depend on your income, mortgage interest, and state and local taxes among other factors. Please check with a tax professional to determine if your interest would be tax-deductible.