What Are Home Equity Loans

What Is A Home Equity Loan

A home equity loanalso known as an equity loan, home equity installment loan, or second mortgageis a type of consumer debt. Home equity loans allow homeowners to borrow against the equity in their homes. The loan amount is based on the difference between the homes current market value and the homeowners mortgage balance due. Home equity loans tend to be fixed-rate, while the typical alternative, home equity lines of credit , generally have variable rates.

Types Of Home Equity Loans

There are several ways to tap into your homes equity: home equity loans, home equity lines of credit or cash-out refinance loans.

These loans all require that you have sufficient equity in your home , and your approval will depend on your , combined loan-to-value ratio, debt-to-income ratio and employment.

Home equity loans

A home equity loan is a fixed-term loan that uses the equity youve accumulated in your home as collateral. Often called a second mortgage, home equity loans let borrowers obtain a lump-sum payment that can be used for major home renovations, consolidating debts or paying for college tuition. This type of loan offers the option of paying it back in equal installments.

Typically, home equity loans are for 80% to 90% of the propertys appraised value. Loan terms include a fixed interest rate and fixed monthly loan payments for up to 30 years.

Home equity loans can have lower interest rates than the best credit cards or personal loans if you have a good , but it puts you at risk of losing your home if you were unable to make payments. Do note that the first mortgage remains as the primary loan on a property if it still carries a balance.

Home equity lines of credit

A home equity line of credit, or HELOC, is a credit line that gives borrowers access to a certain amount of funds based on the accumulated equity in their home. This type of line of credit is a cross between a mortgage and a credit card, letting you tap into your home equity when needed.

How To Apply For A Home Equity Loan

Prepare for a home equity loan application by checking your credit, calculating your home equity and taking stock of how much other debt you already have. Many lenders let you start the application process online by entering your personal and financial information.

The documents and information youll typically need to apply for a home equity loan include:

• Identification or Social Security Number
• Employment history and employers contact information
• Evidence of your income for the past two years, typically through your tax returns
• Last two W-2 statements
• Appraisal or valuation of your home
• Evidence of existing liens on your home
• Amount you pay in child support or alimony

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What Is The Difference Between Fixed And Variable Rates For Home Equity Loans

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A fixed interest rate on your home equity loan means you will make stable and predictable interest payments towards your loan balance for the life of the loan. While, with a variable interest rate, your interest rate and payment can change over time due to a variety of factors.

When you apply for your loan, loan options you receive with variable interest rates often start with lower rates than options with fixed rates, making them more attractive. However, because variable interest rates can change over time, your original variable rate may be pushed higher during your repayment period.

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Which Type Of Loan Is Better For You

Choosing the right home equity financing depends entirely on your unique situation. Typically, HELOCs will have lower interest rates and greater payment flexibility, but if you need all the money at once, a home equity loan is better. If you are trying to decide, think about the purpose of the financing. Are you borrowing so you’ll have funds available as spending needs arise over time, or do you need a lump sum now to pay for something like a kitchen renovation?

A home equity loan offers borrowers a lump sum with an interest rate that is fixed but tends to be higher. HELOCs, on the other hand, offer access to cash on an as-needed basis, but often come with an interest rate that can fluctuate.

As a borrower, it pays to shop around and ask a lot of questions to ensure that you are getting the right financing for your needs at the best interest rate possible.

If You Have Poor Credit

Home equity loans can be easier to qualify for if you have bad credit, because lenders have a way to manage their risk when your home is securing the loan. Nevertheless, approval is not guaranteed.

Collateral helps, but lendershave to be careful not to lend too much, or they can risk significant losses. It was extremely easy to get approved for first and second mortgages before 2007, but things changed after the housing crisis. Lenders are now evaluating loan applications more carefully.

All mortgage loans typically require extensive documentation, and home equity loans are only approved if you can demonstrate an ability to repay. Lenders are required by law to verify your finances, and you’ll have to provide proof of income, access to tax records, and more. The same legal requirement doesn’t exist for HELOCs, but you’re still very likely to be asked for the same kind of information.

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How Do I Apply For A Home Equity Loan

Applying online is a great way to start the home equity loan journey. Apply for prequalification or chat with one of our Home Lending Advisors to see what works best for your situation.

Now that you know what a home equity loan can be used for, you may want to speak with a Home Lending Advisor to figure out which type of loan best fits your needs.

Do I Qualify For A Low Interest Rate

Qualifying for a low interest rate is dependent on your credit score, debt-to-income ratio and payment history. Your credit score indicates your creditworthiness and the likelihood you will repay a debt, while a debt-to-income ratio compares monthly debts and payments to pre-tax monthly income. You can calculate your individual debt-to-income ratio using the following equation:

DTI = Total Monthly Debt Payments / Gross Monthly Income

The bottom line is, borrowers with a higher credit score and a lower debt-to-income ratio have a greater chance of qualifying for a home equity loan with a low interest rate.

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Under The Rule Can I Waive My Right To Cancel The Contract

If you have a personal financial emergency like damage to your home from a storm or other natural disaster you can waive your right to cancel. That eliminates the three-day waiting period so you can get the money sooner. To waive your right:

• You must give the lender a written statement describing the emergency and stating that you are waiving your right to cancel.
• The statement must be dated and signed by you and anyone else who also owns the home.

Your right to cancel gives you extra time to think about putting your home up as collateral for the financing to help you avoid losing your home to foreclosure. If you have a personal financial emergency, you can waive this right, but be sure thats what you want before you waive it.

Home Equity Loan Vs Home Equity Line Of Credit

A home equity line of credit is similar to a home equity loan in that both types of debt involve the homeowner borrowing against their home’s value. However, a HELOC operates more like a credit card. You get a credit limit that you can borrow against repeatedly for a set amount of time called the “draw period.”

Once the “draw period” on a HELOC ends, the credit line will no longer be accessible to the borrower and regular payments begin. HELOC terms can vary, but they often have five- to 10-year draw periods, followed by a 10- to 20-year repayment period. Unlike a home equity loan, a HELOC typically comes with a variable interest rate.

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Home Equity Line Of Credit Loans

As low as

MAX. CLTV FOR RATE SHOWN

Home Equity Line of Credit Rate

¹APR = Annual Percentage Rate is variable, tied to the Wall Street Journal Prime Rate, the index, plus or minus a margin, and can change monthly. There is a minimum rate of 3.00% APR and a maximum rate of 18% APR. HELOCs have a 40-year term . Advertised rate uses a margin of -0.25% and is based on a set of loan assumptions . To open a line of credit you must pay the following fee to us prior to closing a $300 Application Fee, you may also have to pay certain fees to third parties at closing, unless otherwise noted, these fees generally total between $0 and $3,500.00. If you ask, we will give you an itemization of the fees you may have to pay to third parties. Property and flood insurance may be required for the life of the loan. All loans are subject to approval, other conditions may apply.

Please refer to DCU’s Early Federal Disclosure for more information on Home Equity rates, including historical rate examples. You may obtain this information by contacting DCU.

How We Chose The Best Home Equity Loans

To narrow down our list of best home equity loans, we vetted each mortgage lender by evaluating them on the following criteria:

• Loan features: We evaluated the types of loans offered, minimum and maximum loan amount, interest rates, loan terms and credit score requirements for each lender.

• Price transparency: We preferred lenders that openly disclose loan costs, discounts, fees and other charges on their website.

• Application process: We checked eligibility requirements and approval times. In addition, we compared application and evaluation fees, and whether application services were available online, by phone and/or in person.

• Reputation and customer satisfaction: We looked into two main data sources: J.D. Power’s 2021 U.S. Primary Mortgage Servicer Satisfaction Study and complaint data as reported by the Consumer Financial Protection Bureau .

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Our Top Picks For Home Equity Loans Of 2022

• Discover– Best for Low Fees
• Connexus Credit Union – Best Introductory Rates
• Flagstar – Best for Large HELOCs
• Regions Bank – Best Flexible Repayment Terms
• Truist – Best Fixed-Rate HELOC
• Figure – Best for Quick Approvals
• U.S. Bank – Best for Borrowers with Good Credit
• Navy Federal Credit Union – Best for Military and Veterans

• No origination, appraisal or application fees or mortgage taxes due at closing
• CT, MN, NC, NY, OK and TX residents are exempt from early payment penalties

• Prepayment penalty of up to $500 applicable for 36 months after closing
• No information regarding discounts

Approval time

12 weeks

Why we chose this company:Discover makes our top home equity loans list because its fees are lower than most competitors.

Online bank Discover makes our list for its low fees unlike most banks, it doesnt charge any application, origination or appraisal fees. It also doesnt require an upfront cash payment at closing.

Discovers home equity loans have fixed interest rates that range from 5.99% to 9.99% for first liens, and from 6.99% to 12.99% for second liens. You can borrow between $35,000 and $300,000 and choose a repayment term between 10 and 30 years.

Eligibility requirements

With Discover, you can check if you qualify for a home equity loan by providing some basic information before you formally apply. To qualify, you should have a credit score of at least 620 and sufficient equity usually between 10% to 20% in your home.

Approval Time

Not disclosed

Is A Home Equity Loan Right For Me

Although a home equity loan can help you free up funds that would otherwise be unavailable, you shouldnât think of your equity as just another source of funds. When determining if a home equity loan is right for you, you may want to consider the following.

Home equity loans can be:

• A lifesaver when you need cash quickly to cover emergency expenses
• Extremely beneficial for use in renovating your home
• Instrumental in consolidating debt or handling other important costs

If youâve generated enough equity in your home, have a low debt-to-income ratio and a strong credit score, a home equity loan may be worth considering. Plus, home equity loans include fixed interest rates, meaning your monthly payment will never change. This gives you the opportunity to budget accordingly.

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Home Equity Line Of Credit

A HELOC is a revolving credit line. It allows the borrower to take out money against the credit line up to a preset limit, make payments, and then take out money again.

With a home equity loan, the borrower receives the loan proceeds all at once, while a HELOC allows a borrower to tap into the line as needed. The line of credit remains open until its term ends. Because the amount borrowed can change , the borrowers minimum payments can also change, depending on the credit lines usage.

What Are The Warning Signs Of A Dishonest Lender

Dishonest lenders may contact you with a supposed deal on financing. They may say your credit history doesnt matter. They will try to push you into more expensive agreements with less favorable terms and pressure you to commit before youve had a chance to research and consider other options. Know that legitimate lenders will give you time to review the terms of the offer in writing and want you to understand them. They will never ask you to sign blank documents or hide disclosures and key terms.

Here are some rules of thumb to spot and avoid dishonest lenders:

• Avoid a lender who wants you to apply to borrow more than the amount you need.
• Dont deal with a lender who wants you to get financing with monthly payments bigger than you can comfortably make.
• Never work with a lender who wants you to lie on a financing application like saying your income is higher than it really is.
• Avoid lenders who say to sign blank forms. If they fill in the blanks later, you dont know what theyll say.
• Never work with a lender who says you cant have copies of the documents you signed. Of course you can.
• Dont deal with any lender who tells you not to read the financing disclosures. The law says you must get them, so make sure you do and be sure to read and understand them before you sign for the financing.
• And be sure to avoid any lender who promises one deal when you apply, but gives you a different set of terms to sign, with no good explanation of the change.

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How Can I Reduce The Risks Of Borrowing Against My Home

Consider your options and your budget. Keep in mind the risks involved when using your home as collateral. If you cant pay the money back, you could lose your home to foreclosure. Talk to an attorney, financial advisor, or someone else you trust before you make any decisions. Some dishonest lenders target older adults, homeowners with modest means, and borrowers with credit problems. They offer financing based on the equity in your home, not on your ability to repay the balance due. If you fall behind on the payments, the lender can try to declare your financing in default and serve you with a notice of default. Usually thats the first step in the foreclosure process.

Important Legal Disclosures And Information

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