How to Find the Best Home Equity Loan Rates (Complete Guide for Beginners)

Filed in Loan by on November 11, 2020 0 Comments

This page provides detailed information on how to find the best home equity loan rates. Here you will learn what is a home equity loan, how a home equity loan works, where to get home equity loans, how to choose the best home equity loans, best home equity loans, eligible requirements for home equity loans, and all other important home equity loans information you may need. Please stay tuned.

What Is a Home Equity Loan?

A home equity loan also known as an equity loan, home equity installment loan, or second mortgage is a type of loan in which the borrower uses the equity of his or her home as collateral. The loan amount is determined by the value of the property, and the value of the property is determined by an appraiser from the lending institution. Home equity loans tend to be fixed-rate, while the typical alternative, home equity lines of credit (HELOCs) generally have variable rates.

How a Home Equity Loan Works?

Basically, a home equity loan is similar to a mortgage, hence the name second mortgage. The equity in the home acts as a collateral to the lender. How much a homeowner is allowed to borrow will depend in part on a combined loan-to-value (CLTV) ration of 80% to 90% of the home’s appraised value. Of course, the loan amount and the interest rate charged also depend on the borrower’s credit score and payment history.

Traditional home equity loans have a set repayment term, just like conventional mortgages. The borrower makes regular, fixed payments covering both principal and interest. As with any mortgage, if the loan is not paid off, the home could be sold to satisfy the remaining debt.

A home equity loan can be a good way to convert the equity you’ve built up in your home into cash, especially if you invest that cash in home renovations that increase the value of your home. However, always remember that you’re putting your home on the line—if real estate values decrease, you could end up owing more than your home is worth.

If you want to move, you may lose money selling your home or you may not be able to move. And if you are getting a loan to pay off your credit card debt, resist the temptation to increase your credit card bills again. Before doing anything that could jeopardize your home, weigh your options.

Home Equity Loans vs. Home Equity Lines Of Credit (HELOCs)

Home equity loans provide a single lump-sum payment to the borrower, to be repaid over a specified period of time (generally 5 to 15 years) at an agreed interest rate. The repayment and interest rate remains the same over the life of the loan. The loan must be paid back in full if the home on which it is based is sold.

A HELOC is a revolving line of credit, much like a credit card, that you can draw on as needed, payback, and then draw on again, for a term determined by the lender. The draw period (5 to 10 years) is followed by a repayment period when draws are no longer allowed (10 to 20 years). HELOCs typically have a variable interest rate, but some lenders offer HELOC fixed-rate options.

Benefits of a Home Equity Loan

 A home equity loan can be a good option if you need to cover large expenses associated with home renovations, college tuition, consolidating debt, or other types of major expenses. Because you can borrow against the value of your home, a home equity loan may also be easier to qualify for than other loans because the loan is secured by your house.

A home equity loan can be a good option if you need to cover large expenses related to home renovations, college tuition, debt consolidation, or other types of major expenses. Since you can borrow against the value of your home, a home equity loan may also be easier to obtain than other loans because the loan is secured by your house.

1. Fixed Rate

Home equity loans typically carry fixed interest rates that are often lower than credit cards or other unsecured consumer loans. In a changing rate environment, a fixed rate loan can provide simplicity in budgeting, because your monthly payment amount remains the same over the life of the loan and will never increase.

2. Lump Sum

The amount you borrow with a home equity loan is provided to you in one lump sum. This offers you flexibility to cover large expenses. You pay back the loan amount with regular monthly payments that go toward accrued interest and principal for the agreed-upon number of years. Just remember, a home equity loan must be paid in full if your house is sold.

3. Tax Deduction

A tax deduction may be available for the interest you pay on a home equity loan if the loan was used specifically for home renovations. We encourage you to consult a tax professional or visit irs.gov for more information.

Home Equity Loan Requirements

If you are considering a home loan but aren’t completely sure how home equity loan applications are evaluated, here’s an overview of what you can expect and the terms that lenders review with each application.

1. Credit Score

Your credit score is an algorithm of five aspects of your credit history: payment history (35%), debt amount (30%), credit history length (15%), types of credit used (10%) and recent inquiries / Accounts opened (10%). The minimum credit score requirement is 620 for most lenders. Also, the higher your credit score, the more likely your rate will be better, although there is still a dependence on your income and equity. Moreover, applicants with a higher credit score may be eligible for equity with a combined Loan-To-Value above 80%.

2. Credit History

Credit scores are a direct result of your past credit. Late payments can stay on your credit report for up to seven years. However, more recent delinquencies have more of an impact on your score than older ones. While healthy credit habits that limit spending and increase payments will likely contribute to better credit scores, be sure to request your free annual credit report and review it for any errors. You may also be able to work with your creditors to update your account status and sometimes correct negative reports from the past by calling your card issuer and negotiating the difficulties.

3. Employment and Income Verification

Your employment and income information will be verified by reviewing your most recent W2 forms as well as your most recent paycheck stubs covering 30 days, if applicable. If you’re self-employed or receive income from other sources than an employer, you may be asked of your most recent federal income tax returns.  

4. Sufficient Equity

The primary metric used to determine your qualification and interest rate is your combined loan-to-value ratio (CLTV).  CLTV is calculated by taking your existing mortgage balance(s) plus your desired loan amount, divided by your home value:

CLTV = (Loan Amount + Mortgage Balance) / Home Value.

You may be offered a loan if you have less than 90% CLTV, depending on the amount and credit of your loan. Most lenders, like Discover, will conduct an evaluation of your property’s current market value using an Automated Valuation Model (AVM), a Property Condition Report, and in some cases, will schedule an appraisal.

How to Improve Your Credit Score

First, be sure to make timely monthly payments on all of your open accounts on an ongoing basis, as each month may help you build your score. Then try to pay off your debt to reduce the amount you owe: by paying more than the minimum amount and limiting any new spending on your credit accounts, you can lower this ratio to increase your credit score.

As you pay down debt, don’t close any accounts with zero balances: you will keep the average age of your accounts high by keeping them open. Finally, limit any new applications for credit or loans until you feel your credit score is sufficient to earn approval, as the number of hard inquiries on your credit report may push your score down.

Home Equity Loan Application Process

Applying for a home loan can be daunting, don’t worry. We’ll walk you through what to expect when applying for a home equity loan so you can complete the application process with confidence.

1. Take a Financial Inventory

The first thing to consider before applying for a home loan is your current financial situation. All lenders examine an applicant’s financial health and creditworthiness before approving a home loan. To be eligible for a home loan, most applicants must be able to show:

  • A credit score of 620 or better, and a responsible credit history
  • Valid employment and income sources
  • Adequate home equity (you home equity is the difference between your home value and your mortgage balance(s).

To ensure you will qualify for a home equity loan, take a personal financial inventory to make sure that you meet the criteria above and can pay back any money you choose to borrow.

Remember, your home is the security for your home equity loan, which means failure to pay your loan could put your house in jeopardy. Be a smart borrower and evaluate your financial position first.

2. Figure Out How Much Home Equity You Have

Your equity is the amount of your current mortgage subtracted from the appraised value of your home. To get an estimated value of your home, you can visit websites like Zillow or Eppraisal.

3. Determine How Much You Want to Borrow

Knowing how much you want to borrow will not only point you towards the type of home equity loan that is best for your needs, but it will indicate how much home equity you need to achieve your goal. Lenders such as Discover Home Loans offer loans ranging from $ 35,000 to $ 200,000.

Two important factors in determining your borrowing ability are your credit score and combined loan-to-value (CLTV). CLTV is calculated by taking your current mortgage balance(s) plus your new home equity loan amount, and dividing that number by your home’s value.

4. Consider Your Ability to Repay Your Home Equity Loan on a Monthly Basis

Since you’ve already taken a personal financial inventory, you should have an idea of ​​how much you can afford to borrow. Having said that, it is also wise to assess how much you can easily afford to repay on a monthly basis.

Required Information for Home Equity Loan Application

To make the process of applying for a home loan as easy as possible, you should gather all your financial information and necessary documentation in advance. Below is a short list of the information you may need to quickly complete your home equity loan application:

  • Social Security number
  • Unreported debts or support obligations, like alimony and child support
  • Two years of prior employment history and your employer’s contact information
  • Evidence of your income for the past two years
  • Proof of homeownership and home insurance declarations page
  • Copy of your most recent pay stub
  • Current mortgage statement
  • Past two years of W-2 statements (Discover can also obtain this on your behalf)
  • An appraisal or valuation of your home
  • Evidence of existing debts and existing liens on your home

You will also need to provide several signed forms required by your lender. Once you have gathered all the necessary information, it is time for you to speak with a lender to complete a loan application.

How to Find the Best Home Equity Loan Rates

Choosing the Right Home Equity Lender

Before you embark on this journey, make sure you understand what you want from a home equity loan as well as how much you really need, because each lender has its own terms and conditions.

Choosing the right lender for a home equity loan can be an important decision. The lender you choose should help you feel comfortable and knowledgeable about the home loan process. You should look for a lender who will tell you in advance about the entire process of obtaining a loan, especially the requirements for obtaining a loan.

Look for a lender who explains the basics of getting a home loan (or other loan product). Clarity and visibility are necessary requirements for any financial partner. You should receive documentation on the requirements, rates and costs associated with your loan.

“Consumers can choose the best personal loan by doing their research, shopping around between multiple lenders, reading the fine print and only selecting a loan that they know they can afford to repay,” says Jared Kaplan, CEO of OppLoans, an online lender for bad credit loans.

Comparing the Best Home Equity Loans

The biggest factor in most home equity loan decisions is the APR (Annual Interest Rate). Do your homework and get quotes from many lenders to find the best. But the APR is not the only factor to consider when comparing loan options. For example, there is a significant difference between a fixed and an adjustable rate loan.

With a fixed rate you know what your monthly payment is every month without question, which makes it easier to responsibly manage this debt. Adjustable rates can fluctuate with the market, meaning that a year from now your rate could be much higher or possibly lower than the day you signed up for the loan.

Another factor is the fees and closing costs associated with the loan. Some home equity loans have application fees and appraisal and closing fees. Others have prepayment penalties for making additional payments during the term of the loan or paying off the loan before the full term. If you plan to hold the loan for its entire term, it may be a good idea to pay origination fees on a loan with a lower APR.

If you plan to pay down the loan quickly, a lower or no fee loan may be a better option. These costs can vary from state to state and from lender to lender so be sure to follow up with a loan officer to receive an accurate quote for your particular situation before making your decision.

Finally, consider the customer service aspects of taking out and managing the home equity loan. If the rates are equal, but one lender offers assistance from a personal banker, online account management and automatic payments you may want to take advantage of these additional services.

Best Home Equity Loan Rates

There are hundreds, if not thousands, of Home Equity Loans. We researched and reviewed dozens of them before selecting the best competitors. We reviewed these specific lenders to obtain the best home equity loan rates based on the repayment terms, low interest rates, low fees, minimum credit scores accepted by lenders, the application process, autopay features, and industry reputation for customer service.

LENDERLOAN AMOUNTLOAN TERMAPR RANGEBEST FOR
Discover$35,000–$200,00010 to 30 years3.99%–11.99%Low rates
BMO Harris Bank$5,000 and up5 to 20 yearsStarting at 4.24% (with autopay)Different loan options
KeyBank$25,000–$249,9995 to 30 yearsStarting at 3%Homeowners with limited equity
Spring EQ$25,000–$500,000Up to 30 yearsStarting at 4.99%Fast funding
Flagstar Bank$10,000–$500,0005 to 20 yearsStarting at 5.88% (with autopay)Flexible loan terms
U.S. Bank$15,000–$750,000Up to 30 yearsStarting at 3.8% (with autopay)Low fees at a national bank
Navy Federal Credit Union$10,000–$500,0005 to 20 yearsStarting at 4.99%Service members
Frost$2,000 and up7 to 20 years4.49%–5.64%Low fees at a regional bank
Connexus Credit Union$5,000 and up5 to 20 yearsStarting at 4.482%Branch network
Regions Bank$10,000–$250,0007 to 15 years3.25%–11.625% (with autopay)Customer experience

How Much Can You Borrow?

Your borrowing ability depends on several factors. These factors include your home value, the lending regulations where you live, your credit history, your income, your debt-to-income ratio (DTI), and the limit on the percentage of your home’s value eligible for borrowing against as determined by your lender. Combined Loan-to-Value Ratio (CLTV) will also play a factor. The CLTV is calculated by taking your current mortgage balance plus your potential home loan amount, then dividing that number by your home value. The lower the CLTV, the better.

Once you know how much home equity you have and how much you can probably borrow, consider how you want to use your funds to determine the best type of home equity loan to meet your goals. There are many ways to use the equity in your home. Here are just a few common uses:

  • Home improvement and renovations
  • Debt consolidation
  • Big-ticket purchases (like a car or family vacation)
  • Finance a wedding
  • Pay for school tuition
  • Get money for emergency expenses, etc.

Frequently Asked Questions about Home Equity Loan

What is home equity?

Home equity is the stake you have in your property, as opposed to the lenders. It’s calculated by subtracting how much you still owe on your mortgage from the appraised value of your home, which means that your home equity should gradually increase as you make payments on your mortgage. Home equity is one way to measure your personal wealth, since you can borrow from your home equity in the form of loans or lines of credit.

How do you calculate your home equity?

Over time, you build up equity in your home as you make payments on your mortgage. You’ll need a substantial amount of equity in your home to qualify for a home equity loan.

To calculate your home equity, subtract your current mortgage balance from the appraised value of your home. From there, you can figure out how much you can borrow.

Where can I get a home equity loan?

A variety of banks and credit unions offer home equity loans. If you have an existing relationship with a bank, it may be best to start your search there, but it’s always a good idea to shop around with a few lenders to compare rates, fees and loan terms.

A good way to do this is by taking advantage of prequalification forms, which let you see your potential rates and eligibility with a lender without impacting your credit score.

When is a good time to use a home equity loan?

A home equity loan may be a good option if you’ve been planning a large home renovation or if you need to consolidate debt and you spot a good rate. If you’ve been considering a home equity loan, now is the time to lock in your rate. Rates are lower than historical benchmarks, but many banks are tightening approvals, and some are even temporarily suspending their home equity products.

What are the minimum requirements?

Many lenders have fixed LTV ratio requirements for their home equity loans — meaning you’ll need to have a certain amount of equity in your home to qualify. Lenders will also factor in your credit score and income when determining your rate and eligibility.

Minimum requirements generally include a credit score of 620 or higher, a maximum loan-to-value ratio of 80 or 85 percent and a documented source of income.

Are home equity loan rates higher than mortgage rates?

Home equity loan rates are typically higher than mortgage rates, since home equity loans are considered second mortgages. In the event of a foreclosure, the lender of a second mortgage will be paid only after the lender of the first mortgage has been paid in full. To make up for this risk, lenders offering second mortgages will charge higher interest rates.

What is the three-day cancellation rule?

Unlike other loans, like personal loans, home equity loans must go through a closing period. During this period, all home equity loans are legally subjected to a three-day cancellation rule, which states that you have the right to cancel your home equity loan until midnight of the third business day after you sign your contract. Changes to the contract, as well as funds disbursement, cannot occur during this time.

How fast can I get a home equity loan?

Because home equity loans typically require appraisals, it can take longer to get a home equity loan than a personal loan. From application to funds disbursement, the process typically takes two to four weeks — although some new online lenders are trying to shorten that process.

Conclusion

Before applying for a loan, make sure you understand what you are spending your money on and how much you really need. Try not to borrow more than you can repay, and make sure you can handle monthly payments along with your other obligations.

Remember to compare lenders to find the best home equity loan for you. Look at several lenders and compare interest rates, origination fees, and other terms. Take a close look at the situation so you can choose the loan that will work best for you.

We hope you will find this information useful. Do you have any queries on how to find the best home equity loan rates? Please feel free to let us know so we can assist you with any information you will need.

Please, do not hesitate to share it with friends, colleagues and relatives whom you know may be in need of this kind of information. Thanks for caring and do have a nice one ahead!

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