Home Equity Loan Services Review
Why Get a Home Equity Loan?
The top performers in our review are LendingTree, the Gold Award winner; TD Bank, the Silver Award winner; and Citizens Bank, the Bronze Award winner. Here’s more on choosing a home equity loan to meet your needs, along with detail on how we arrived at our ranking of the 10 best home equity loans.
One of the major benefits of homeownership is knowing that you are not throwing money away on rent. Rather, your mortgage payments build equity as you make payments on your loan. If you ever sell your home, you know you're getting back part of what you put into it.
If you have a bigger than expected expense or want to tap into that equity to make improvements or repairs, a home equity loan may be a good option. You can choose from two types of equity loans: either a lump sum loan against which you make monthly payments or a home equity line of credit (HELOC). Both loan types are based on your home's equity, but they work a bit differently, as discussed below. To learn more about home equity loans, look at our articles on these loans and HELOCs.
Pros & Cons of Home Equity Loans
While you can use a home equity loan to finance just about anything, this loan is not a typical debt loan; this is spending an investment. When you take out a home equity loan or HELOC, you are depleting an investment you have been building up for years. These funds should not be spent lightly or used for frivolous purposes.
However, there are times when additional funds may be necessary. A positive reason for borrowing against your home equity is to increase the value of your home through needed repairs or improvements. Many people also use home equity loans to pay for their children's education.
One pro of home equity loans and HELOCs is that they often come with lower interest rates than other loan types or credit cards. HELOCs typically have a lower initial interest rate than traditional fixed-rate equity loans; however, because HELOCs have variable rates, you may find the rates are higher toward the end of paying off your loan than when you first started.
A con of home equity loans compared to credit cards is that you have additional fees that you wouldn't pay with a credit card, such as closing costs. Many companies waive closing costs, and you are not responsible for paying those costs unless you pay off your loan early, in which case lenders expect you to cover them after the fact. There may also be additional fees you will have to pay, but these vary by lender.
As is the case with any loan, there are risks involved. The main risk is defaulting on the loan and losing your home, as these are secured loans with your home as collateral. A second risk pertains to a HELOC. If you receive a substantial credit limit, say somewhere around $100,000, and you borrow the full limit, you will have very large if not unmanageable monthly payments when the draw period ends and the repayment term begins. Making an honest assessment of what you can afford is the best way to avoid these pitfalls and permanent negative consequences.
How to Take Advantage of Your Equity
Traditional Equity Loan
When choosing between a traditional loan or a line of credit, you should understand what each loan type entails and the pros and cons of each choice. An equity loan provides a single lump sum all at once against which you make set monthly payments. Traditional equity loans come with fixed rates that do not change over the life of the loan, so you can expect the same cost for principal and interest each month, though changes in taxes may affect the total monthly payment.
A home equity loan is a good choice if you need a large amount of money at once rather than over an extended period of time. You also have a set rate and payment over the term of the loan that never fluctuates. One downside is that unlike a line of credit, you cannot borrow any further funds in the future.
Home Equity Line of Credit
If you wish to use your equity like a credit card, you can receive a line of credit against which you can borrow when you need the money and make monthly payments on the balance. With a Home Equity Line of Credit, or HELOC, there is a draw period during which time you can withdraw up to your approved credit limit. After the draw period ends, the repayment term beings during which you pay back the remaining balance like a standard loan. HELOCs come with variable rates that change over time.
A HELOC might be a better choice if you need steady funds spread over several years rather than a large sum all at once. A bonus is that like a credit card, if you pay off the principal amount in a timely manner, you pay little to no interest. However as far as interest is concerned, a variable rate may be a downside to some. Further, many services require you to draw a minimum amount at closing.
Commonly referred to a second mortgage, with mortgage refinancing you create a new, lower loan based on the equity you have in your home. You can lower your interest rate, or you can use a cash-out option to use the equity you've built. For example, suppose you have a property that is worth $200,000 with a remaining mortgage balance of $100,000. If you refinanced that to a $120,000 mortgage, you would essentially keep $20,000 of the equity you've built.
Compared to a home equity loan, refinancing typically has lower rates but higher closing costs. Over time, these differences may balance out. But as mentioned above, many factors go into determining your costs. To learn more about refinancing, have a look at our Mortgage and Refinancing site.
A reverse mortgage is another option that works for tapping your home's equity. There are stricter requirements for a reverse mortgage, however. To begin with, you must be at least 62 years old. Many lenders prefer that you own the property outright or have a very small amount left to pay on your mortgage. Similar to an equity loan, you can receive the loan amount in a single lump sum or in equal monthly installments paid to you from the creditor, which is why it is a reverse mortgage; you receive payments rather than make them each month.
While there are pros to a reverse mortgage loan, there are also cons. These include higher fees than you typically see with other loans, including higher interest rates, insurance premiums and origination fees. Plus, if the housing market drops, you may end up owing more than your home is worth. And as mentioned above, there are stricter requirements to qualify for this type of loan. To learn more about this option, read our review of reverse mortgage lenders.
What You Should Know
As with all loans, there are conditions, terms and fine print. Home equity loans and HELOCs are no different. It is important to understand how these loans work. You want to understand what your rates are, whether they are fixed or variable, the term of your loan, the basic process and if you are eligible, because whether or not you qualify for a loan is the first step.
To be eligible for borrowing against your equity, you must meet a few minimum requirements. One of the major considerations is your loan-to-value ratio (LTV). This number is figured by dividing the amount you owe on your mortgage by the appraised value of the property. Most companies prefer this number not exceed 80 percent.
Lenders also look at the amount of equity you've acquired. When examining equity, companies consider how much equity you have and weigh that figure against the loan amount you're seeking. Most companies lend between 80 and 90 percent of your home's total equity, though you may find some lenders are willing to lend up to 100 percent. Other companies require a minimum dollar amount.
Companies also consider your credit score and debt-to-income ratio (DTI). Most require a good-to-excellent credit score, with the average requiring a minimum FICO score of 660 to 700. Many services may accept lower FICO scores depending on other factors. The average accepted DTI is typically around 40 percent. However, each individual provider has its own requirements and discretion for accepting applicants outside of its set parameters.
The majority of lenders have an online application process, during which many perform a soft credit pull to determine your eligibility for a loan. If you qualify and choose to accept a home equity loan or HELOC, you'll be asked to provide more information and required documentation, including proof of mortgage, income and employment, among other documents.
Rates & Fees
While home equity loan rates and fees vary from company to company, there are some similarities they share across the board due to industry standards and competition. Interest rates are always subject to change, and your personal credit worthiness and situation directly affects the rates for which you are eligible.
Other typical loan fees apply in most cases, though some lenders may waive certain fees at their discretion. Closing fees are standard with these types of loans, so you should expect to pay a closing fee, though the amount will vary according to the lender. The lender may wish to complete its own appraisal of your home at cost to you, so be aware of a potential appraisal fee.
While not as common, a loan provider may charge an application fee. Most companies do not charge this fee, but it's important to ask. Some less obvious fees to ask about are maintenance fees and early payoff fees. If you plan to make larger payments than what is required of you to pay off your loan more quickly, make sure you choose a company that does not charge this fee.
Payments & Terms
The term of your loan is set at closing, but there are different options in lengths and different processes depending on the loan type. The most common term for a traditional home equity loans is 30 years; although, 15 years is usually an option.
A HELOC also has a draw period, which typically is between five and 10 years. After the draw period ends, the repayment term begins, which, on average, is an additional 10 to 15 years but varies depending on the conditions of your loan.
What We Evaluated, What We Found
When considering which lender would be the best for your home equity loan, we scrutinized eligibility requirements. Lenders with higher accepted LTV and DTI ratios, higher maximum loan amounts and lower minimums might mean you're more likely to qualify, but again, qualification and final approval of a loan hinges on several factors. Companies such as Key Bank and Bank of America accept a higher LTV ratio while other lenders like Citibank accept a higher DTI. For overall flexibility with eligibility requirements, LendingTree is a great choice. As a broker, it connects you to its network of lenders so you have a number of options to choose from, including a number of top 25 lenders and subprime lenders.
Loan amounts can vary and range from a max of $500,000 to a minimum of $10,000. Of the lenders we reviewed, U.S. Bank has the highest maximum amount and Key Bank has the lowest minimum.
We also assessed each lender's customer service and support. We reached out to companies by phone and email and evaluated the response and support we received to questions we posed. We also evaluated the ease with which our application was completed. In our experience, Third Federal Savings & Loan provided us with the best overall customer experience. Both Third Federal and Citibank provided accurate information and a willingness to answer our questions when we contacted them, and TD Bank and Wells Fargo have some of the best customer support options, including quick responses to emails and hundreds of local branches across the country if you need face-to-face support. If you're looking for the most simplistic process, Wells Fargo, TD Bank and Third Federal are great choices with quick underwriting turnaround time and immediately available funds once you close on your loan.
Closing costs can add up, but most lenders on our lineup are likely to waive these costs. Some fees, though, like the early payoff fee, you will be responsible for. Of the lenders that charge closing costs, the fees are generally a few hundred dollars. If a company chooses to waive closing costs, it may expect you to cover those costs if you pay off your loan early. In those cases, early payoff fees range from the total of the closing costs up to closing costs plus a few hundred dollars. Some lenders, including U.S. Bank, Citizens Bank and Chase, do not charge early payoff fees.
Our Verdict & Recommendations
If you are concerned about qualifying for a home equity loan, LendingTree is a good choice because it connects you with its pool of lenders, providing you with more options and opportunities to be accepted for a home equity loan or HELOC. Key Bank and TD Bank have less strict requirements than other services, so they are also a good choice.
For the best rates and fees, Third Federal is a good choice. Its fixed interest rates are lower than most other services; its variable rate cap is competitive; and it does not have closing, early-payoff or application fees.
Our lineup includes a roundup of the best home equity loan services on the market, each offering competitive rates and fees. As with all loans, your interest rate, loan amount and other exact figures are ultimately going to depend on the company's prequalification requirements. It is best to shop around to find a loan that offers the best rates possible, that fits what you are looking for and that offers a repayment schedule that you can personally manage.