What does it mean to consolidate your debt and refinance your mortgage? As debts go, mortgages tend to offer low-interest rates, which is why many...
Home equity loans allow a homeowner to take out a loan against their equity in their own home. Think about these loans as a second mortgage. The property is used as collateral to secure the loan, and the lender will let you borrow up to the amount of equity that you have in the home. The loan will have a specific term with payments the borrower will have to make.
The popularity of home equity loans mainly increases due to 2 reasons; 1). Home prices go up in value and 2). Interest rates are low. Both of these things have happened throughout the United States since the pandemic began. There is some talk of interest rates being raised in 2022, and this also has motivated folks to lock in today’s low-interest rate pricing.
Home equity loans are being used in a variety of different ways. Some homeowners want the loan to make home improvements, which can enhance the value of the property further. The home improvement items purchased can also be used as a tax deduction against interest rates on the loan. Other uses of a home equity loan include paying off other higher interest debt or investing the capital from the loan.
Unlike a home equity line of credit (HELOC), home equity loans are paid out as a one-time lump sum payment. HELOC’s often have adjustable interest rates, meaning your debt payments will vary depending on the broader interest rate market.
Before a borrower takes out a home equity loan, they may want to consider the lender they are working with. Lenders often have specific stipulations for borrowers to meet to secure a loan. Going over general lender requirements will usually help a borrower figure out what options they have.
Lenders need to examine the borrower’s finances in order to help determine whether the borrower can meet their debt obligation. Many lenders will require a borrower to have a minimum credit score of 620. Debt to income is another ratio the borrower will examine. This feature looks at a borrower’s monthly debt payments and divides them by their income before taxes. Many borrowers usually require a debt-to-income ratio of 43% or lower. Oftentimes these limits can widely vary depending on the lender. Borrowers that have stronger personal finances tend to have more lenders that are willing to give them a loan.
Once a borrower comes to terms with their personal economic reality, their next step will be to examine lending options. A key tool at a borrower’s disposal is the loan estimate tool. The loan estimate tool is a three-page report that lays out the exact terms of all the fees that will be assessed for a loan (interest rate, closing costs, and internal company fees). The Consumer Financial Protection Bureau requires lenders to share this document with all borrowers. The loan estimate tool is a way to make the terms of a home equity loan more transparent for a prospective borrower.
Outside of the specific terms of a home equity loan, the lender’s quality of customer service is an important consideration. Figuring out how to do a home equity loan can be a daunting task for a borrower that has never secured one before. A quality lending team should have a representative that can patiently walk the borrower through the necessary steps of securing a loan. For more information on comparing the best mortgage rates check out Lendstart’s expansive directory!
| Lender | Loan Amount | Loan Term | APR Range | Best For |
| Discover | $35,000 – $200,000 | 10 to 30 years | 4.15% – 11.99% | Low Rates |
| BMO Harris Bank | $25,000 – $150,000 | 5 to 20 years | starting at 4.54% (with autopay) | Different Loan Options |
| KeyBank | starting at $25,000 | 1 to 30 years | Starting at 2.32% (With Client discount) | Homeowners with limited equity |
| Spring EQ | Up to $500,000 | Not specified | Starting at 5.205% | Fast funding |
| Flagstar Bank | $10,000 – $500,000 | 10 to 20 years | Starting at 6.53% (with autopay) | Flexible loan terms |
| U.S Bank | $15,000 – $750,000 | Up to 30 years | Starting at 3.8% (with autopay) | Low fees at a national bank |
| Navy Federal Credit Union | $10,000 – $500,000 | 5 to 20 years | Starting at 5% | Service members |
| Frost | Starting at $2,000 | 7 to 20 years | 4.49% – 5.64% (with autopay) | Low fees at a regional bank |
| Connexus Credit Union | Starting at $5,000 | 5 to 20 years | starting at 4.26% | Brench network |
| Regiona Bank | $10,000 – $250,000 | 7 to 20 years | 3.5% – 11.625% (with autopay) | Customer experience |
| Market | Average Rate | Average Rate Range |
| Boston | 4.04% | 3.50% – 4.50% |
| Chicago | 5.22% | 3.00% – 6.19% |
| Dc Metro | 6.76% | 5.50% – 9.25% |
| Detroit | 5.22% | 4.13% – 6.45% |
| Houston | 5.99% | 5.99% – 5.99% |
| New York Metro | 4.50% | 4.50% – 4.50% |
| Philiadelphia | 4.93% | 3.50% – 5.39% |
| Market Total | 5.20% | 3.00% – 9.25% |
Borrowers may want to prioritize their important needs within a home equity loan. Below are some of the more common characteristics of a home equity loan, and some further information about why borrowers may want to take them into consideration.