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How to shop for home equity loans
Home equity loans can be an excellent tool to consolidate debt, pay for your child’s college tuition, or finance a home improvement project. Even borrowers with less than perfect credit can qualify for large loan amounts at competitive rates. But there are risks to consider before you apply for a home equity loan.
Are you in the market for a home equity loan? This complete guide to home equity loans will tell you everything you need to know to tap into your home’s value.
Home equity financing
There are two types of home equity financing:
- Home equity loans (HELs) provide the total amount upfront.
- Home equity lines of credit (HELOCs) provide a credit line to draw from.
A home equity loan is a fixed-rate loan that gives the borrower the full loan amount in a single lump sum. A home equity line of credit (HELOC), in contrast, supplies the money as a pool of funds that you can draw from as needed.
With both types of loans, your home acts as security for the borrowed money. This collateral allows lenders offering home equity loans and HELOCs to charge lower interest rates than you might find with an unsecured loan. It also brings added risk. If you fail to pay off your debt, you risk foreclosure on your home.
Home equity loans and HELOCs gained popularity in the early 2000s and peaked during the Great Recession.
In times of economic downturn or inflationary upsurge, homeowners may seek to meet expenses by tapping into their home equity with a secured loan. But these are not the only times when home equity loans can be put to good use. In times of economic boom, homeowners can draw upon them to take advantage of profitable opportunities. And at all times, homeowners can use them to improve their homes, to further educate themselves or their children, to consolidate debt, and for other purposes.
What is home equity?
Simply put, home equity is the difference between your home’s total value and what you owe on your mortgage. For example, let’s say that your home is worth $280,000, and the balance on your mortgage is $200,000. In this case, you’d have $80,000 of home equity to borrow against.
As you would expect, home equity loans come with limits. You can’t borrow the full amount of equity in your home. In general, you can borrow up to 85% of your total home equity. Based on the above figures, the math works out as follows:
- $280,000 total value - $200,000 remaining mortgage balance = $80,000 in home equity.
- $80,000 x 85% = $68,000 available to borrow.
However, other factors, such as your income and credit history, are also taken into consideration when determining how much you can borrow.
Home equity loans may not be as common as they were back in 2008, but very low interest rates still make them worth looking into.
What are the pros and cons of home equity loans?
Home equity loans can be an inexpensive way to finance large purchases, such as home improvement projects or college tuition. However, there are some disadvantages to consider also. Here is a summary of the main advantages and disadvantages of home equity loans.
Here is a list of the benefits and the drawbacks to consider.
- You can borrow a substantial sum provided you have enough home equity to cover it.
- According to the IRS, you can claim a tax deduction if you use the loan to “buy, build, or substantially improve your home.”
- Because your home secures the loan, interest is usually lower than with a personal loan.
- Generally have a fixed rate, which protects you from payment hikes.
- Closing costs are typically much higher than with personal loans.
- If you default on the loan, you could lose your home.
- Less flexible than a home equity line of credit.
Finding the right home equity loan lender
With so many lenders to choose from, finding the best option for your circumstances can be a challenge. The first step is to find lenders with excellent company rating and consumer reviews. But that’s just the beginning.
Simply put, not all home equity loans are created equal. Shopping around for the best deal can save you thousands of dollars. Lenders offer radically different rates and terms, so it’s important to compare at least three offers before committing.
To find the best offer for your circumstances, the Consumer Financial Protection Bureau suggests weighing these considerations in addition to interest rates and loan limits.
When shopping around, start by identifying your goals and needs. Do you want great customer service? Do you have a borderline debt-to-income ratio? Are you looking for a low-fee or no-fee lender?
Once you know your priorities, there are some question you should know the answers to. Let’s review those now.
Is there anything I can do offline to improve my results?
SuperMoney home equity loan comparison tools allow you to compare the rates and terms of lenders in a transparent and simple way. If you keep your priorities in mind and make sure you know the answers to the key questions we cover below, you can find an excellent lender right here.
This doesn’t mean you can’t do some offline legwork if that makes you more sure of your results.
In addition to researching lenders online, you may ask your family and friends for lenders they would recommend. Real estate agents often work with loan originators and know who helps their clients most. So real estate agents, too, may be worth talking to.
You may also talk to banks, credit unions, nonbank lenders, and mortgage companies. You can even speak to mortgage brokers. But remember, they are in the business of arranging loans and are not always impartial.
What are the lender’s home equity loan requirements?
Most lenders require you to have at least 20% in home equity, solid proof of income, and a credit score of 680 to qualify for a home equity loan. However, requirements will vary from one lender to the next. So compare the requirements before applying to find those that match your situation.
How much does the lender charge in fees for a home equity loan?
Home equity loans can come with a small army of fees. These fees are particularly common:
- Application fee: Covers the costs of reviewing, considering, and processing an application.
- Origination fee: Paid to initiate the loan. Often ranges from 0.5% to 2% of the loan amount.
- Appraisal fee: Covers the cost of having the home appraised by a professional to determine the home’s value.
- Broker fee : Paid if you hire a broker to help you find and get a home equity loan.
- Document preparation fee: Covers the cost to prepare any loan-related documents.
- Prepayment fee: Covers the amount a lender loses in interest if you pay off your loan early.
You may also see one or more of the following fees:
- Loan processing fees.
- Underwriting fees.
- Lender or funding fees.
- Recording fees.
The types of fees charged and the amounts will vary from one lender to the next. All of these fees will add to the total cost of the loan, so it’s important to take them into account when seeking the best offer.
What interest rates does the home equity lender offer?
Home equity loans typically come with fixed interest rates, meaning you pay equal monthly payments over a fixed term. The interest rate will be expressed as an annual percentage rate (APR) that encompasses interest, financing charges, and points.
Lenders will typically advertise a range of APRs. The rate you receive will depend on the lender’s approval criteria, which can include your credit score and income. The housing market and the amount of equity in your home also play a role.
What loan terms are available through the home equity lender?
A loan term is the amount of time you are given to repay a loan. In the case of home equity loans, terms often range from five to 30 years. Be sure to check the loan terms available from a lender and ensure they suit your situation. The longer the term, the lower the monthly payment amount — but the higher the overall interest cost.
How much will the home equity lender let you borrow?
The loan amount offered to you will vary from one lender to the next because each company defines its unique range of loan amounts and set of lending criteria. According to the Federal Trade Commission, most loans max out at around 85% of your available equity. However, the amount you can get will also depend on personal factors. These include your credit report, income, and so on.
What is the home equity lender’s funding time?
A home equity lender’s time-to-funding is how long it takes them to deliver the money to you after approving your loan. If time is of the essence with your loan, this will be an important factor to check.
What do reviews say about the home equity lender’s customer service?
Your experience with a home equity loan matters. Look for lenders who makes it easy and convenient to apply, originate, repay, and manage the loan. User-friendly online account dashboards, mobile apps, live chat services, and quality customer service all help to make the loan process more enjoyable.
Check what other borrowers say about lenders by reading SuperMoney’s free home equity loan reviews and company ratings.
Getting a home equity loan
Before you start contacting prospective lenders, check your credit score. Your credit is a major determining factor in the types of offers you’ll receive. The better your credit, the likelier you are to lock in competitive rates and terms.
Then, you’ll want to contact several different lenders to narrow down your options. Once you’ve put together a short list of offers, try asking the lenders to adjust the terms or interest rates, or to match a better offer from another lender.
Plus, keep an eye out for the following red flags, which can indicate shady or predatory business practices:
- Changing the terms of your loan (like the interest rate) at the last minute.
- Insisting on bundling an insurance plan into your loan.
- Approving you for payments that are so high that you know you’ll have difficulty meeting them. Remember, if you end up defaulting, the lender will foreclose on your home.
Carefully read the closing papers before signing anything. If the loan isn’t exactly what you wanted, don’t sign. Leave it on the table or negotiate changes.
Can you cancel a home equity loan after committing to an offer?
Yes! The Three-Day Cancellation Rule gives you that right, free from penalties.
Set by the Truth in Lending Act (TILA), the Three-Day Cancellation Rule gives borrowers a three-day cooling-off period for second-priority mortgages, such as home improvement loans and home equity loans.
HELOCs vs. home equity loans
The second type of home equity loan is known as a home equity line of credit (HELOC). This loan works like a credit card, giving you a source of funds to draw from as needed.
Like home equity loans, HELOCs are secured by the equity in your home and generally offer loan terms ranging from five to 15 years. But unlike a home equity loan, a HELOC is a variable-rate loan that offers a credit line in lieu of a lump sum.
Because you manage the balance of the loan, a HELOC is the more flexible option. By controlling the balance, you also regulate the interest costs, only paying interest for what you use.
Finding the right home equity loan begins with thorough research. So you’ve come to the right place. Below you’ll find SuperMoney’s carefully curated list of home equity lenders. The list is complete with real-user reviews, APR ranges, loan amounts, and loan terms. To learn more about any lender, simply click the name to read our in-depth review.