Understand home equity lending and how lenders can acquire home equity customers

home sitting on a pile of money to demonstrate home equity

Home equity lending is a hot topic, with homeowners boasting near-record amounts of equity. Mordor Intelligence estimates that as of 2024, the home equity lending market size is estimated at nearly $31 billion, and is expected to grow to $36 billion by 2029. According to CNBC, American homeowners have a combined total equity of nearly $30 trillion — roughly $200,000 of cash for each owner-occupied home in the U.S. It’s a great time for lenders to climb aboard the home equity lending bandwagon.

Whether you’re starting a home equity program or seeking to enhance your existing program, an automated valuation model (AVM) is a great tool to have in your belt. Since AVMs can be used as the primary valuation in underwriting home equity loans, leveraging a lending-grade AVM to identify customers ensures the initial amounts quoted are reliable until closing. By providing a reliable loan estimate up front, lenders can improve loan conversion and eliminate customer experience pitfalls such as late stage changes in eligibility.

In this post, we will review the three primary home equity services lenders can offer customers to access their equity, and how lenders can quickly and efficiently identify customers that would benefit from and be eligible for home equity loans using AVMs.

What is home equity lending?

Home equity lending allows homeowners to access value in their home without selling it. As home prices appreciate and homeowners make mortgage payments over time, the share of the home that they own grows — this is home equity. Home equity lenders provide an option for their clients to convert their growing equity back into debt for cash. 

Offering the right home equity loan product for your clients and the current market

There are three primary home equity loan types lenders can use to provide homeowners with access to their equity: fixed-rate loans, home equity lines of credit, and cash-out refinances. Let’s take a look at each loan type:

Fixed-rate home equity loans

With a fixed-rate home equity loan, the lender provides one lump-sum payment to the borrower. This sum is then repaid over a period of time — typically 15 years — with a set interest rate. Both the monthly payment and the interest rate remain the same over the life of the loan. Fixed-rate home equity loans must be repaid in full if the home is sold.

Home equity line of credit (HELOC)

A HELOC is a revolving debt. Once the loan balance is paid down, it can be borrowed again in the same draw period. For example:

If a borrower is approved for a $20,000 HELOC and they borrow $14,000 against the credit line, they have a remaining balance of $6,000 to draw against. If the borrower pays $10,000 toward the principle, they will then have $16,000 in credit available to draw against.

After the draw period ends, the borrower will enter a repayment period. On a 30-year HELOC, the draw period could be 10 years with a 20-year repayment period.

Unlike a fixed-rate loan, the interest rate of a HELOC fluctuates depending on the market rate. A HELOC’s monthly payments will vary depending on the amount borrowed and the current interest rate.

Cash-out refinance

The process of paying off an existing mortgage loan with a new loan is called mortgage refinancing. Homeowners typically refinance to secure a lower interest rate, or increase or decrease the term of their mortgage.

With a cash-out refinance, borrowers can refinance their mortgage for more than they owe and access the difference in cash. If a borrower owns a home valued at $500,000 and they owe $250,000 on their mortgage, they can refinance with a $300,000 mortgage and take the $50,000 difference in cash.

What can customers do with home equity loans?

Home equity loans can be used to pay down debt, upgrade a home, and more:

  • Fixed-rate home equity loans are great for borrowers who need cash outright. Borrowers may use this option to upgrade their home, perform repairs, or pay sudden expenses like medical bills.
  • HELOCs are great for borrowers who want cash over longer periods of time, such as for large-scaled home improvement projects. HELOCs offer more flexibility and give borrowers the ability to pay as they borrow.
  • Cash-out refinances are commonly used to secure lower interest rates or different loan terms. 

What is an AVM and how can lenders use it to identify home equity customers

An AVM is a computer algorithm that produces an estimate of a property’s value. Every AVM has its own method of calculating that value, but most AVMs take nearby real estate data — including recent sale prices, characteristics, and features of nearby properties — and feed that data to algorithms to generate an estimate.

Each AVM on the market is built upon a certain set of data and each with its own calculation method. This creates a lack of standardization and varying levels of AVM quality. We can classify an AVM as either marketing-grade or lending-grade.

Marketing-grade AVMs are typically public-facing, designed to pique the interest of

potential borrowers, and are useful for sales lead generation. Lending-grade AVMs are typically business-facing, designed for situations that require highly precise results, and are used by financial institutions.

When we think of marketing to potential customers using an AVM, it’s natural to assume that a marketing-grade AVM will do the trick. However, lending-grade AVMs are more reliable and will give potential borrowers a better, more realistic idea of the value of their home and what type of home equity loan may be best for them.

How lenders can find home equity customers using an AVM

Loan officers and lenders can leverage fast and cost efficient home valuations using an AVM to identify potential home equity customers.  

Determine tappable home equity for your existing customers.

First, obtain an updated home value for each existing customer home loan. Then, using the AVM and the outstanding mortgage principal, calculate homeowner equity. Lenders can determine eligibility and calculate potential loan amounts for each home based on the current home equity and loan-to-value limits of each program. 

Identify benefits of home equity over other loan products

Compare the rates on existing customer personal loans and identify interest savings from swapping personal debt for home equity using the loan amount estimated with an AVM. 

Supply home-specific offers.

Through this analysis, lenders can identify prospective customers and use targeted marketing materials specific to their home, including the estimate of their home equity and potential loan amount based on the AVM.  

Get started using a trusted, lending-grade AVM

Download our free ebook, “8 Questions to Ask Your AVM Provider for Home Equity Lenders,” to discover how to choose the right AVM provider and ensure you’re making the most of our powerful AVM technology. 

Clear Capital’s ClearAVM™ is trusted by top 10 lenders for its accuracy and reliability. Learn more about ClearAVM and email sales@clearcapital.com to begin enhancing your home equity lending marketing.

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