How to Evaluate Fintech Home Equity Products

You can evaluate a fintech’s home equity offer by comparing interest rates, terms and any additional benefits.

If you’re in the market for a home equity product like a home loan or home equity line of credit (HELOC), you can approach your bank or credit union. However, a growing number of fintech companies also offer these products.

A fintech, or financial technology company, operates primarily online and uses advanced technology that enables a digitized lending process. As a result, they can often offer a faster approval process and potentially better terms for the loans. Learn more about how housing products work and how to evaluate a fintech’s housing stock offering.

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 usually much lower than those on personal loans and other loan products. Many people also use home equity loans or lines of credit to pay off higher-interest debt, such as high credit card balances.

Homeowners with significant equity can also use an equity product to help fund living costs in retirement. This practice is called a reverse mortgage since the owners start the reverse process of receiving payments at regular intervals against the value accumulated in their home over time, which they may not need as long as they age.”

Types of Home Equity Products

When considering products from a fintech, you’ll want to understand the differences in how they work.

With an equity loan, the lender provides a lump sum 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 around 80% combined loan-to-value ratio, meaning you can usually only use part of your equity. You pay back a mortgage in regular payments with a fixed interest rate.

Home equity lines of credit (HELOCs) work more like a credit card. Homeowners get a line of credit that they can access as needed, 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.

How to Compare Home Equity Products

When evaluating housing products from a fintech company, you’ll want to consider 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, while traditional lenders typically offer variable interest rates. A fintech can charge minimal upfront fees because their process is digital and not expensive, while traditional lenders can charge higher upfront fees since their process is labor intensive.”

Equity requirements

Some fintech companies may accept more of your equity as collateral than others. Many companies do not accept a 100% combined loan-to-value (CLTV), but you can potentially use up more of the home’s value with some products than others. More commonly, you will be approved for a loan-to-value ratio of 80% of less.

You may also meet minimum equity requirements, such as having at least 20% equity in your home. Each fintech will set its own specific minimum equity requirements.

Interest

The interest rates on housing products will vary from lender to lender. The lower the interest rate you have, the more you save in total loan costs. So compare interest rates among several fintechs to find out which one is the most affordable. But there are other factors to consider with interest as well. This means the lowest fixed interest rate over comparable lending periods. Some fintechs may have a more efficient underwriting process, different risk management through access to data, or cheaper capital costs that they can pass on to you in the form of lower interest rates. And there may be other factors to consider with interest as well.

Some housing products have fixed interest rates, which are more predictable. Others have variable interest rates, which can potentially be lower, but can rise over time. Consider your current interest rate environment as well as your personal financial situation when considering what type of interest rate may work best for you.

Length of loan

The repayment terms for mortgages and lines of credit will also vary. With mortgages, the term can vary from five to 30 years. You will make regular payments to the lender during that time.

With a home equity line of credit (HELOC), the fintech will extend a line of credit to you for a set period of time called the “drawing period.” Then your “pay-down” period will begin and you’ll start making regular payments, usually at a variable rate.

Other terms

As technology companies, fintechs often offer innovative products, including with their equity loans. For example, lenders such as Synergy One Lending and Figure offer a HELOC that is powered by blockchain technology to provide a more efficient application, underwriting and financing process. By using blockchain and other technology, fintechs can make loan assignments significantly less expensive.

Finally, be sure to evaluate the different fees associated with different fintech products. A mortgage or line of credit may have a competitive interest rate, but higher closing costs. Many home equity loans or HELOCs come with closing costs of 2% to 5%.

The bottom line

Fintech lenders can offer competitive equity products such as loans and lines of credit that may suit your financial needs. Review all your mortgage options, compare pros and cons and different terms. Consider consulting a professional financial advisor for guidance on the best housing product for your particular situation.