If you own a home, it may be the biggest source of untapped cash that you have at your disposal. If you're considering making renovations or simply having more money than personal loans can offer, it may be worth investigating how unlocking part of your home equity can help you.
There are usually two types of arrangements that financial providers offer: the first is a home equity loan where you will receive a lump-sum payment and then return it in fixed amounts as per the loan agreement. The other is a home equity line of credit (HELOC), which gives you the ability to borrow money several times from an available maximum amount. Both have advantages and disadvantages to them, but you can find the best option for you with the help of a consultant.
Typically, a home equity loan is advised if you are looking to make a large cash purchase, whereas a HELOC can be used to manage cash flow as it relates to renovation, etc.
To be eligible for either you would need to have a reasonable amount of equity, even if you still have a mortgage on your home, and a fair to decent credit score.
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1. Discover: Best overall
Discover is a leading online bank and payment service in the U.S that offers a home equity loan to release a percentage of the value of your home. This lump sum loan is then paid back, with interest, over a fixed number of years.
With a range of features and benefits such as competitive interest rates, a personal banker and the possibility of spreading the loan over 30 years, Discover puts together a very attractive package.
They do, however, have eligibility criteria for their home equity loan. First of all, you will need a credit score of 620 or higher with only a maximum debt-to-income ratio of 43%. While customers with the highest credit scores can go up to 95% CLTV (Customer LifeTime Value), the average consumer will need at least 10% equity once their primary loan and the home equity loan are taken into consideration.
The combined convenience of an online application process with the service of a personal banker makes this service really unique. Not only is it easy to keep track of your application, but you can get answers to any questions you may have that are completely tailored to your personal circumstances.
Overall, the home equity loans that Discover offers are wide-ranging, from $35,000 to $200,000. However, one thing to note is that home equity loans are not available in Iowa or Maryland.
2. Wells Fargo: Best for HELOCs
Wells Fargo offers a great range of HELOCs for those who might not otherwise be eligible. Their options are adaptable to a wide range of personal situations and can be adjusted to suit families’ plans for the future.
HELOCs are available to residents in most states, with a low minimum draw amount of $300 in all states except Texas, where the minimum draw amount is $4,000. Plus, they offer discounts for pre-existing Wells Fargo customers.
Their current starting base rate APR is around 4% (variable) although they adjust their rates depending on the index. They also have options available that allow customers to cap the interest rate increase they could face for the period of the loan whilst maintaining a variable rate.
Wells Fargo allows clients to apply online, via an easy to use platform as well as accepting applications in a branch, and over the phone. There is a helpful application status tracker on the website too.
Customer service is easy to reach, either over the phone, online or in person. The company has brought its services into the 21st Century with efficient online systems to help customers keep track of their finances and repayment schedule.
3. Bank of America: Best for online applicants
Bank of America offers HELOCs to residents in 34 states that also include a range of discounts on the standard interest rates if you meet certain conditions. For loans under $1 million, there are no application fees, closing fees, or annual fees.
Their current starting base rate APR is 3.49% variable, which goes up to 5.40% after a year. You can save up to 1.50% off that rate by receiving a 0.10% discount for each $10,000 you withdraw when you open the account. Preferred Rewards clients also receive a discount, as do those paying with an automatic payment from certain Bank of America accounts.
Applying for a HELOC with Bank of America is straightforward, the application can be filled out online. They will then contact you to discuss the right product for your circumstances and guide you through any extra documents or requirements they need to complete your application.
Plus, customer services can be reached online, over the phone, and in person. They have an easy-to-use app and website which makes managing the application process easy and allows you to keep track of your borrowing once you have been approved.
Bank of America’s HELOC offers a flexible solution for those looking for a line of credit with good rates who may be able to offer extra discounts in some circumstances.
4. Citizens Bank: Best customer service
Citizens Bank offers both home equity loans and lines of credit (HELOC) at lower than average rates and does not charge application or closing fees. They operate out of 22 states and offer their customers a range of financial services.
Credit score requirements with Citizens Bank are on par with the national average, meaning you will need good credit or better to be able to receive their best rates. They have Bank Home Loan Originators available in branch and over the phone to discuss what option is best for you.
Because they don’t offer a complete online application, they are more hands-on than other providers. The application process can be started online, but you will need to complete it either over the phone or in-person at one of their 1,000 branches. The application processing time falls within the average range, and customers can expect to receive funds between 30 and 60 days after applying.
Citizens Bank has a lot of educational information available on their website which may help you find out if they are a good option before you apply. Their customer service team can be reached over the phone or you can go in-branch to discuss their services.
5. Chase: Best for existing customers
Chase offers multiple options for HELOC loans including fixed-rate borrowing. Although they don’t offer a lump sum home equity loan, they can still offer help with refinancing as a one-time lump sum.
Closing fees vary by state, and in most cases, there are no closing fees. But in some states, there are taxes that must be paid upon closing, so check with Chase before signing up. There is an origination fee and an annual fee of $50 each, but there are no application fees.
For HELOCs, Chase has a maximum debt-to-income ratio of 50% but does require extra information from applicants if the debt-to-income ratio is above 43%. They are relatively flexible in terms of the type of property they will offer a HELOC on and offer a range of discounts including existing Chase customers.
Whilst the percentages may seem small, over time the discounted rates add up and could leave you with more disposable income for the things that matter. You can receive a 0.25% discount if you already have a qualifying Chase account, 0.25% if you can provide the bank with contracts or bids for home improvements, and a further 0.12% if you set up automatic repayments.
Applicants can apply online, in person, or over the phone, and Chase gives an estimated time frame of 45 days from application to closing.
6. TD Bank: Best loan with a high maximum lend
TD Bank has a high minimum equity amount to be eligible for their home equity lines, but their maximum loan-to-value ratio of 89.9% is higher than the industry average of 80%.
Their home equity loans and lines of credit services (HELOC) fall within industry averages in terms of rates and fees. They offer both fixed and variable-rate loans. Depending on the specific product you are approved for, you may have to pay fees, but these will be explained to you during the application process.
It’s worth knowing that the application process can be carried out partly online, but the finalization has to be done in-branch. And while they only operate in 15 states, you can check via their website if you are near a branch before progressing with an application. You can also apply over the phone.
TD Bank offers an excellent amount of information about home equity loans and HELOCs on their website, including a comparison guide that features benefits such as an emergency overdraft facility for HELOC customers.
TD Bank is a good option for those who live near a branch and who need a home equity loan or HELOC solution that is somewhat flexible.
7. Alliant Credit Solutions: Best for long term solutions
While they don’t offer traditional lump-sum home equity loans, Alliant Credit Union offers attractive home equity line of credit (HELOC) products for customers in most states - but be advised that they do not offer a lump sum home equity loan.
With no set minimum equity requirement, this is a good solution for customers who might not be eligible elsewhere. Alliant offers most of its HELOC options with a 4.25% APR (variable). They do not disclose specific credit requirements to be eligible for their home equity lines of credit, but their advisors will be able to discuss your options.
Alliant Credit Union is one of the largest credit unions in the U.S. but this means that you will first need to become approved to join the credit union before going on to be approved for a HELOC. Yet joining can certainly be worth it as their fees are minimal for those borrowing under $250,000 but vary for lending over that amount.
One thing to take into account though is that they only have one open branch in Chicago, so applications and customer care are both done online or over the phone in most cases.
8. Loan Depot: Best for home equity loans
As one of the first online-first lending companies to offer home equity lending, LoanDepot has a range of options both online and in-person. They have over 150 partner lenders across the country who receive their clients to offer advice and customer service face-to-face.
While they don’t offer home equity lines of credit (HELOC) services they do offer a competitive rate when it comes to home equity loans. These range from 4.65% APR variable to a higher 18% APR for customers with a lower credit score. You should be able to get an indication of where your FICO score sits before you apply.
Applications can be completed both online and in the offices of their multiple partners, and now offer in-person locations at 150 partner branches across the country.
If you have a reasonable amount of equity and your credit score is in good health you may benefit from some of the lowest rates but with such flexible home equity borrowing solutions, LoanDepot should be able to provide a home equity loan for almost everyone, even those who have already been turned down by more affordable lenders.
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Why trust us on home equity loans?
We spent 40 hours contacting the lenders we reviewed, comparing rates and terms, and reading through the fine print to find all the hidden fees. We looked for lenders that have good reputations and operate across state lines. The lenders we included represent a small cross section of the available options. We included Lending Tree, which is not a lender itself, to help you find other options we haven't explored. You can also check the options at your local bank or credit union – it may offer membership discounts or other advantages.
We looked for lenders that don’t charge application and closing fees. These can be as much as 5% of your loan, so not having them helps you access the full equity of your home.
Always keep in mind the loan-to-value ratio (LTV) of your home. This is a complicated way of expressing the difference between the total value of your home you own, and the amount you’re lending.
When you get a home equity loan or line of credit, it combines with any existing loan you have on the property, like a mortgage. Lenders typically look for a combined LTV of 80% or less, but there are a small number of lenders that accept LTVs as high as 90%.
For example, if you still owe $140,000 on a home with an appraised value of $200,000 and want a home equity loan worth $25,000. The existing loan of $140,000 would be combined with the $25,000 creating a total loan of $165,000.
A simple way to calculate LTV would be:-
165,000 (combined loan) ÷ 200,000 (total house value) = 0.825 × 100 = 82.5%
This would mean that the LTV would be 82.5% of your home’s total equity, so you would need to find a lender that accepts LTVs higher than 80%.
How we tested home equity loan companies
Because each loan is different and depends on factors that vary from borrower to borrower, we averaged each lender’s rates and terms and combined them to create scores that represents where it stands compared to the rest of the industry. Any company with a B or higher has offers that are better than the industry average.
We’d like to stress again that rates change depending on a variety of external factors, and the rates and terms you get depend a lot on your credit and income as well as the amount of equity you have in your home. These grades are meant as a jumping-off point to help you make an educated decision.
We also took stock of the educational tools and customer service each lender offers. These resources can give you a better idea of how a home equity loan works and ways to get a better rate.
Home equity loans vs. HELOC
There are two ways to take advantage of the equity you’ve built in your home. A home equity loan is a lump sum, while a home equity line of credit (usually called a HELOC) lets you take a little out at a time. Think of it as the difference between a loan and a credit card. With a credit card, you have a limit but only pay back what you put on it.
A HELOC may seem more attractive because of its flexibility, but a standard home equity loan also has some advantages, mainly that the interest rate is fixed. HELOCs usually have variable rates and can be subject to shifts depending on external economic factors.
Standard home equity loans have terms that range from five to 15 years. A HELOC has a draw period of up to 10 years, during which you can use the line of credit. After the draw period, you have up to 20 years to repay. Some HELOCs let you make interest-only repayments during the draw period.
How does a home equity loan work?
A home equity loan, more often known as a second mortgage, lets you borrow against the value of your home. You build equity in your home by paying down your mortgage as well as by the increases in the property value and any renovations you make to the house.
For example, if you bought a $200,000 home and have paid off $150,000 worth of the first mortgage, that $150,000 represents your equity and is the amount you can tap into with a home equity loan or line of credit.
With lower rates than a credit card or personal loan, tapping into your home equity can give you the money you need for home repairs or to pay for a child’s schooling.
Benefits and drawbacks of home equity loans
You can use the money from a home equity loan for just about anything. But it’s best to think about it as spending your savings. By tapping into your home’s equity, you’re using up an investment that you’ve been building up. It shouldn’t be used frivolously, nor is it a particularly good idea to use it to pay other debts. The best use is for remodeling or repairs, something that will add more value to your home. Many people also use home equity loans to pay for a child’s education.
One advantage of home equity loans and HELOCs is that the interest rate is often lower than personal loans and credit cards. HELOCs usually have lower initial rates than a fixed-rate loan, but HELOCs have variable rates that may end up higher by the time you’ve finished paying off your balance.
Unlike credit cards, there are often additional fees, such as closing costs. Not all the lenders we reviewed charge these, but many do. Some don’t charge them unless you pay off your loan early. Other fees, such as application fees or yearly maintenance fees, vary by lender.
When taking out one of these loans, you need to make sure you can adequately make payments. These loans are secured with your home, so any default means your home may be foreclosed. HELOCs may seem less risky, but if fully tapped, a high credit limit of $100,000 will leave you with large payments when the repayment term begins. Always make an honest assessment of your ability to repay before taking out a home equity loan or HELOC.
What fees can you expect with a home equity loan?
Home equity loans come with a variety of fees attached, though they vary by lender. Many lenders allow you to roll the closing costs into the loan. Here are some of the most common fees you can expect to see when you apply for a home equity loan or home equity line of credit:
This fee is charged for processing the application. Most lenders we reviewed don’t charge origination fees. If a lender charges this type of fee, it can be up to 1 percent of your loan cost. Some lenders let you choose between an early closure fee or an origination fee.
The lender will appraise your home to determine how much it is worth and how much equity you have in it. The appraisal also determines your loan-to-value (LTV) ratio – the amount you owe divided by the value of the property. Lenders won’t let you borrow more than 85 percent of the LTV. Appraisal fees vary depending on the type of appraisal. A desk appraisal, done by an automated program, or a drive-by appraisal can cost up to $500. A more exhaustive appraisal, which may be worthwhile if you’ve done a lot of work on your house, can cost up to $1,000.
Lenders perform this search to verify the title of the home is in your name and there aren’t any liens or other outstanding issues. This can cost from $100 to $250.
Do you have to get an appraisal for a home equity loan?
The short answer is yes. To get an accurate read on your home’s value and the amount you’re eligible for, the lender will likely have your home appraised. This can cost from $50 to $500, depending on the type of appraisal the lender uses. This can be paid upfront or rolled into the loan.
Like many things associated with lending, there are levels of complexity, and some lenders may not order an appraisal unless your home exceeds a certain value.
In the rare case you get a home equity loan on a mortgage that’s between six months and a year old, the lender may use the appraisal for that loan. There will be a small fee to recertify the appraisal, but it can be as little as $150.
This is an automated method of home appraisal. The lender uses software that comes back with a value based on comparable recent sales. The program includes a confidence score that shows how closely it represents the market value. This is often used for homes with a high amount of equity. A desktop appraisal can cost between $75 and $200.
This involves an appraiser stopping by and taking pictures of the exterior. The rest of the appraisal consists of taking information from similar sales and comparing those values with that of your home. One drawback of a drive-by appraisal is it may not accurately reflect your home’s value.
This is the most thorough type of appraisal, and it involves an exterior and interior inspection of your home. It is the most costly type of appraisal, running between $300 and $500.
How long does it take to get approved for a home equity line of credit?
Approval on a home equity loan or line of credit usually takes between 30 to 45 days. In some cases in can take as little as two weeks. A lot depends on the specifics of your application, how many documents you need to provide and the type of appraisal the lender needs to do.
The underwriting process is virtually the same as for a regular mortgage. The lender will review you finances and see if you meet their requirements. And you’ll have to provide the same types of documents you did when you got the first mortgage.
These documents include:
- The deed to your home
- You current pay stub
- The last two years of tax returns, along with any additional schedules if you’re self employed
- Mortgage statement showing the outstanding balance
- A valuation of your property
- A list of payoffs if you’re using the loan to consolidate debt
If you have as much of this documentation ready when you apply, you can streamline the process. In general, the requirements for a home equity loan or HELOC aren’t as standardized as those of a regular mortgage, so some of these requirements will vary depending on the lender you choose.
Many lenders offer online applications. This can speed up the process, and you’ll usually get approved in a few days, though the actual underwriting process takes longer. With an online application you’ll still need to provide W-2 forms, paystubs and other documents.
How do you increase the equity in your home?
A home equity loan or line of credit is one of the reasons to build equity in your home. You can tap the equity in the future to consolidate debt, make repairs or make other big purchases. However, you don’t need to be thinking of a loan to benefit from improving your equity, and there are many things you can do to raise your home’s value. Equity usually increases in one of two ways: your debt decreases or the property value increases.
A large down payment is one of the easiest ways to get equity. A down payment is a part of the home you already own, and if you put down 20 percent or more, you’ll avoid paying for private mortgage insurance. Opting for a 15-year mortgage is another way to quickly build equity. Your monthly payments will be higher, but you’ll usually get a lower rate and can start chipping away at the principle faster than with a 30-year mortgage.
Depending on external factors, your property value may increase naturally. However, it’s a bad idea to peg your hopes on this because home prices tend to be cyclical. There are other ways to increase your home’s value that you can control. Making improvements, internally and externally, can increase your home’s worth. Remodel Magazine, lists common improvements and the expected return on the costs of those improvements.
Can you sell your home if you have a home equity loan?
The short answer is yes you can. Having a home equity loan or line of credit doesn’t prevent you from selling your home. Like all loans, you pay them off as part of the sale. This means the proceeds from selling your home go to pay off the original mortgage and then the home equity loan, with any leftover coming back to you.
For example, if you sell your home for $250,000 and have $50,000 left on the original mortgage and $80,000 on a home equity loan, after selling, you’d pay off both those loans and have around $120,000. There’s no guarantee your home will cover the loans completely though. Even so, you’re obligated to pay both and may have to negotiate with both lienholders. If your home value has decreased and is worth less than the mortgage and home equity loan, you may not be able to complete the sale.
It's a good idea to do some prep work before you begin selling. Before listing, make sure you’ll get enough from the sale to fulfill your obligations. Get a payoff quote from your mortgage holder. Consult a realtor to see what price you should list at and if it's worth selling now.
Should you get a home equity loan or a debt consolidation loan?
In most cases, using the equity you’ve built in your home is one of the best ways to consolidate your other debt, especially if you’ve owned your home for a while and can qualify for the lowest rate. Home equity loans tend to have low rates, typically around 5%, especially compared to debt consolidation loans with rates from 8% to 20%. However, note that most home equity loans have closing costs that can cost up to a few thousand dollars. Read more about the best debt consolidation companies.
The biggest risk with a home equity loan is that your home is used as collateral, so a failure to make payments on time can result in your home being foreclosed. Lenders use a loan-to-value formula to determine how much they’ll actually loan, and in some cases the amount they’ll loan against your home’s equity may not be enough to consolidate all of your debts.
If your home equity isn’t to the point where it would cover your debts, a debt consolidation loan might be a better option. These can have higher limits than home equity loans. Debt consolidation loans also tend to have lower fees compared to the closing costs of a home equity loan.
Balance transfer credit cards are another option for consolidating debt. This is a credit card that lets you put your other debt onto it. Like all credit cards, rates can be high, and with these cards there’s a fee to transfer the balance, usually from 3% to 5% of the amount you transfer. There’s also a limit on how much of the total balance can come from a balance transfer, including the transfer fees. For example, a card with a $100,000 credit limit may only allow transfers of 70% of that limit (or $70,000).
Is a personal loan better than a home equity loan?
Even if you’ve built substantial equity in your home, tapping into it can be risky. Especially in the current environment where rates are rising, it may be better to opt for a personal loan, depending on what you plan to use the money for. Here are some things to consider as you decide between a home equity loan and a personal loan:
Depending on your credit score, home equity rates still tend to be comparable to those on personal loans. The average rate for a fixed-rate home equity loan is around 8.7%. Rates on personal loans vary more based on the lender.
If you have outstanding credit, a personal loan may be a better option because you can get a lower rate. Though you still need good credit to qualify, home equity loans have less strenuous credit requirements, so if your credit is good but not great, you may look at tapping your home equity.
If you need a quick decision, a personal loan might be a better option. Home equity loans require appraisals and underwriting similar to a regular mortgage. Some lenders may also need to verify information about income and employment, which can take longer. Some personal lenders have quick application processes that can be finished in a week or less.
Home equity loans are secured, which means your home is collateral – if you fail to make payments, your home could be foreclosed. Personal loans are unsecured, which means you don’t provide any collateral. However, if you fail to make your payments, the loan can be sent to collections.
If you use your home equity loan for house repairs and improvements, you can deduct the interest from taxes. There are no tax breaks for personal loans.
What can you use a home equity loan for?
A home equity loan or line of credit can give you a financial boost, but you shouldn’t go into one without a plan. Home equity loans have many uses, but depending on how much you currently owe on your primary mortgage, it could overextend your finances. If you’re looking for funds for any of the following, it may be a good option:
This is the most common reason to take out a home equity loan or line of credit. The benefit is the improvements you make can increase your home’s value, which is good if you plan on selling soon. Often, things like new carpet or flooring and improvements to the kitchen or bathroom add the most value.
Paying for education
Using your home equity to pay for your child’s or your own education can be a good idea. Often, you can get a lower rate than you would on a student loan through a private lender. However, you should compare the rates you’re eligible for before using a home equity loan for education.
You can use home equity to pay down credit card bills. As outlined above, there are pros and cons to this approach, but if you have good credit, you can save substantially.
Most financial advisers caution against using home equity for expensive vacations or things like boats. It would be more prudent to use home equity to invest than to spend on extravagant things that might come back to bite you.
How much can I borrow on a home equity line of credit?
The amount you can borrow with a home equity line of credit (HELOC) depends on a variety of factors. The primary one is how much equity you have in your home. The simple way to calculate that is to find out how much your home is worth and subtract your current mortgage balance.
Another factor that influences how much you can borrow is the lender’s loan-to-value (LTV) requirements. Basically, this is the percentage of your home’s value it’s able to lend. Most lenders have LTVs that range between 75% and 90%. So if you have a home worth $200,000 and the lender has an 80% LTV limit, you could get up to $160,000 on a HELOC. The actual amount depends on your mortgage balance. In the above example, if you have $80,000 left on your balance, you’d be eligible for a HELOC worth $80,000.
Unlike a standard home equity loan, which is a lump sum, HELOCs function like credit cards, where you can withdraw a little at a time. HELOCs have a variety of fees, including standard closing costs. You’ll also likely have to maintain a minimum balance. Most HELOCs have a minimum draw amount, but it's possible to get this waived.
Are there home equity loan programs for veterans?
While there’s no specific VA home equity loan, you can get a standard home equity loan or HELOC with a VA mortgage. The application process is the same as for a home equity loan on a standard mortgage, and you pay all the standard closing costs and appraisal fees. Keep in mind that lenders typically have requirements on how much equity you must have in your home, usually 20% or more. Because VA mortgages don’t have down payment requirements, it may take longer for you to build up the necessary equity.
Though there’s no home equity loan program, the VA does offer a cash-out refinance program that in some ways approximates a home equity loan. A cash-out refinance replaces your current mortgage and gives you the equity you’ve built in cash. Often, a cash-out refinance has a lower rate than the initial mortgage. One of the main differences between a home equity loan and a VA cash-out refinance is the home equity loan requires a completely separate payment and has its own terms and rates.
Depending on what you need to tap into your home equity for, a standard home equity loan or HELOC could be a better option than the refinance. These are private loans and not guaranteed by the VA, so you have to meet the lender’s requirements to be eligible. This includes having a credit score of at least 620 and meeting the lender’s specific debt-to-income, work history and income requirements.
Tax law affects home equity deductions
Tax season is approaching, and recent changes to our country’s tax laws have affected the way home equity loan tax deductions work. The primary changes affect the interest deduction and adjust the limit on the loan balance you can deduct interest on.
Previously, you could deduct interest no matter how you used your home equity loan, but the 2017 Tax Cuts and Jobs Act changed that. From 2018 through 2026, you can only deduct interest if you use your home equity loan or HELOC to make improvements to your home. You can’t deduct the interest if you use the loan to pay off debt or for other personal expenses. This doesn’t affect the ways you can use your home equity loan or HELOC – you can still use the money however you want – but the interest isn’t tax deductible in some cases.
The law also changed the total mortgage balance you can deduct interest for. Previously you could deduct interest on a home worth up to $1 million, or $500,000 if you were married filing separately. The new law reduces this limit to $750,000, or $370,000 if you’re married filing separately.
Keep in mind that the balance restriction applies to the combined amount of your mortgage and home equity loans. So if you have a home worth $500,000 and take out a home equity loan for $300,000, you can only take a deduction on the interest of $750,000 of the loan, provided the loan is used on home improvements and not for something like consolidating your debt.
The IRS doesn’t have a form to provide any information about how you use your home equity loan, so it's a good idea to keep any receipts for home improvements made with proceeds.
Home equity mistakes to avoid
Getting a home equity loan is relatively straightforward if you meet most of your lender’s criteria. Still, these loans are not without their downsides. Here are a few things to watch out for when looking at home equity loans:
If you freelance, work part time or do gig-economy work like drive for a rideshare service, you may have a harder time getting approved. Lenders tend to prefer borrowers with predictable income. It's not impossible, but you have to provide a lot more income documentation than if you work a steady job, including up to two years of tax returns.
Unsecured debt to secured debt conversion risks: One of the most common reasons for getting a home equity loan is to pay off credit card debt. A home equity loan often has a lower interest rate, but if you’re unable to make payments, you risk losing your home. If you’re struggling to make payments on your credit cards, consider debt settlement instead of risking your home.
Home value fluctuations
Homes tend to increase in value, but that’s not always true. Local real estate price fluctuations can result in lower home values, especially if external economic factors impact where you live. It's certainly possible to end up underwater, owing more than your home is worth. The more equity you keep in your home, the better insulated you are against any market downturns.
Home equity loan do’s and don’ts
Having equity in your home is never a bad thing, but just because you’ve built up equity, it doesn’t mean you need to run out and tap into it. Here are some do’s and don’ts to consider before you take out a home equity loan or HELOC:
Do know how much your home is worth
Get an appraisal so you have a good idea of your home’s value. This can give you a clearer idea of how much equity you actually have. Home values rise and fall, and in the rare case your home is worth less than it was when you bought it, you should hold off.
Do shop around
Compare multiple offers – check out banks, credit unions and alternative lenders. Different lenders offer different amounts based on how much equity you’ve built up, but very rarely are you able to tap into the entire amount.
Don’t get a home equity loan if you plan on selling soon
Generally, if you sell, you need to have paid off most of the debts related to your home. If you get a home equity loan to make improvements for selling, it's wise to pay off as much as you can before you sell. If you do sell, you need to pay off the remaining mortgage and the home equity loan before you see any profit, so if you sell at a loss, you could still owe money.
Don’t use your home equity for luxuries
A boat, home theater or something else fun may seem enticing, but it's not the best use of the value you’ve built up. It may seem like these things are all paid for, but you’ll be making monthly payments. And if something should happen and you can’t make your home equity loan payments, you could risk losing your home.
How to shop around for the best home equity loan
If you’re thinking of getting a home equity loan, it's a good idea to look around and see what your options are. You should look at both home equity loans and HELOCs and compare fixed and variable rates. Here are some other things to think about when looking for a home equity loan or line of credit:
Consider your current lender
Look at the rates your current mortgage lender offers. You may be eligible for a discounted rate for having more than one account open with that lender. Another benefit is the application process may go faster since the lender already has information about you and your home, so it won’t need to gather as much data to underwrite your home equity loan.
It’s a good idea to get at least three quotes when looking for a home equity loan or line of credit. Also, see what you can get on a fixed rate versus an adjustable rate. A fixed rate leaves you less vulnerable to future rate increases, though it may be costly if you want to sell in the near future. In some cases, you may be able to split the difference and get a loan with a fixed introductory rate that becomes adjustable later on.
Think about what you want to do
Consider what you need to use your home’s equity for before you apply. If you need a large sum of money for a home repair, renovation or other big expense, go with a standard home equity loan. On the other hand, if you want to use your home equity loan as a way to augment your income, a HELOC is a better option. However, you should avoid tapping your home equity for something like a vacation – you put up your home as collateral, and you could lose it if you hit tough times down the road.
Can you refinance a home equity loan?
If you already have a home equity loan or line of credit, you may be able to refinance it. Refinancing a home equity loan is similar to refinancing a typical mortgage. You can refinance to a new rate or a different term as well as switch from an adjustable rate to a fixed rate.
There are several options for refinancing home equity loans. For example, you can do a cash-out refinance on both your home equity loan and your primary mortgage. With this loan, you pay off the first mortgage and use the cash-out portion to pay off your home equity loan – then you can pocket anything left over. This may be a good option if your primary mortgage has a high rate or a variable rate. It’s also worth considering if you got an FHA mortgage and are now on better financial footing and want to stop paying mortgage insurance.
You can also just refinance your home equity loan or HELOC. There are many reasons to refinance a home equity loan, though people most commonly do so to lower their rate or convert to a fixed rate. You can also refinance to extend the terms or get a higher loan amount.
Another option is to refinance your home equity loan and primary mortgage into one primary mortgage. First mortgages tend to have lower rates than home equity loans, so this may help lower your payments.
When refinancing a home equity loan, you should keep a few things in mind. First, to refinance, you must go through the loan approval process again. As such, your home needs to be appraised, and you have to pay closing costs and other fees. Also, if your home’s value has dropped, it may hamper your efforts to refinance. And if it’s lost too much value, you may not be approved.
Is a reverse mortgage better than a home equity loan?
Seniors who own their homes outright can still access that equity, and there are more options to do so. They can choose between a home equity loan, a HELOC or a reverse mortgage, each of which has certain advantages.
A reverse mortgage, also called a home equity conversion mortgage, lets you use your equity to receive a lump sum of money or monthly payments. With a reverse mortgage, you don’t make monthly payments – you only repay the loan when you die, sell the home, or stop making tax or insurance payments. Typically, a reverse mortgage is paid off with the sale of the home.
To be eligible for a reverse mortgage, you need to be at least 62 years old and have substantial equity in your home. The loan is usually used for living expenses, but a reverse mortgage can also be used to purchase a smaller home.
Home equity loans have monthly payments, so it isn’t a good idea to get one if you’re on a fixed income and trying to minimize the number of bills you pay. However, one advantage a home equity loan has over a reverse mortgage is the rates tend to be lower. Both have similar fees – you need to pay origination fees and other closing costs like appraisal fees, though the fees for a reverse mortgage tend to be higher.
Reverse mortgages don’t have credit requirements, but the lender often checks your income to see if you can keep making insurance and tax payments. Home equity loans require a credit check and a score in the high 600s to get approved.
In general, if you’re eligible, there are reasons to consider a reverse mortgage over a home equity loan. For example, there’s more flexibility in the ways you can access the payout. However, reverse mortgages have some drawbacks, including that they reduce any inheritance you could leave your heirs, and they could impact some retirement benefits you might otherwise be eligible for.
What can lower a home’s value?
Though you may not think of it as one, your home is an asset, and its value rises and falls depending on a lot of factors, some of which are out of your control. If you’re interested in tapping into your home equity for a loan or line of credit, consider the following things that influence your home’s value:
A run-down home in ill-repair will be appraised with a lower value than one in top condition. This includes the yard – curb appeal can boost your home’s appraised value. Maintaining your home and staying on top of repairs can keep its value from slipping.
Avoid going overboard
It’s tempting to think that anything you add to your home will add an equal amount of value when it comes time for an appraisal. However, this isn’t necessarily true. Some improvements are considered standard maintenance. You my think others, like adding a pool, add a lot of value, but they tend to actually decrease the value – buyers may see your addition as more of a headache than a luxury.
If comparable homes in your area are going for low prices, any appraisal on your home will likely be low.
If there are a lot of homes for sale nearby, you may see your house’s value fall. This is because the supply outweighs the demand.
Sometimes, circumstances beyond your control can conspire to reduce your home’s value – for example, neighborhood and location are some of the biggest determinants of home value. If you live near a school district with low performing schools, you may get a lower appraisal. Nearby hospitals, stadiums, megachurches and fracking sites can also reduce a home’s value.
Other ways to access your home equity
Home equity, whether built through improvements or the natural appreciation of the housing market, is an asset you can potentially take advantage of. Home equity loans and lines of credit are the most common ways to tap into home equity. However, they aren’t risk-free – by putting up your home as collateral, you risk foreclosure if you can’t make your payments. Also, if you are still paying off your home, you have to make another monthly payment in addition to your current mortgage, which can put a bind on your finances.
Debt consolidation and home improvements are good uses for a home equity loan. However, using one for investing isn’t really recommended – it can be risky, and the rate of return on your investments isn’t guaranteed to surpass the interest on your home equity loan.
Another option for accessing home equity is through a shared appreciation agreement. Through one of these agreements, you contract with a company to get a portion of your home’s equity in exchange for a share of the value when it appreciates. The way this works is if you qualify, the shared appreciation company gives you the cash up front. There are no monthly payments, but you have to repay that initial investment plus a percentage of the appreciated value after 10 years.
The balloon payment at the end of 10 years makes a shared appreciation agreement riskier than a standard home equity loan or HELOC. However, many of the companies that offer them have less stringent underwriting agreements than lenders who offer home equity loans. As such, if you don’t think you’ll be approved for a loan, a shared appreciation agreement may be worth looking into.