Home equity loans explained
Home equity loans, also referred to as “second mortgages” are just one of the few ways you can use the equity in your home to receive extra cash that can be used for virtually anything. This type of loan, however, is most often used to pay for large expenses, like home remodeling or debt consolidation.
The amount of the loan depends on your home’s market value, or equity, and how much you’ve paid so far on your mortgage. For example, if your home is valued at $300,000 and you still owe $200,000, the amount of equity you have would be the difference—$100,000. The market value would be decided by an appraiser.
Just as with a regular mortgage, you can get a home equity loan from an online lender or from a bank or credit union. A home equity loan is generally easier to qualify for than other loan types you’re using your home as collateral.
How to Get a Home Equity Loan in 6 steps
Top 3 Home Equity Loans Lenders
Pros and cons
While home equity loans can be a great way to convert your home into cash, it’s important to weigh the pros and cons before making a decision.
Pros of Home Equity Loans
- This type of loan is generally easier to qualify for since you’re securing it with your home, which puts less risk on the lender (but more on the borrower).
- Using your home as collateral also means you’ll be getting lower interest rates than unsecured loans, like credit cards or personal loans.
- The interest rate is fixed for the duration of the loan, so borrowers don’t have to worry about interest rates going up or down over time.
- Borrowers have the freedom to use the money for anything, whether it’s home remodeling or purchasing an investment property.
- Your interest rates can be tax-deductible if the money is used to renovate your current home (the same property being used as collateral on the home equity loan).
Cons of Home Equity Loans
- Using your home as collateral can be beneficial for the reasons mentioned above, but it can also be very risky for the borrower. If you’re no longer able to make payments on the loan for any reason, you could lose your home.
- Unlike other types of loans, you’ll have to pay closing costs and other fees for a home equity loan, which can range between 2%-5% of the loan amount.
- If you pay the loan off early, you may be on the hook to pay early termination fees, depending on the lender.
- Having a home equity loan means being responsible for having two mortgages and therefore two monthly payments, which would be adding more to your debt.
Understanding your home’s equity
As mentioned earlier, to understand how much equity you have in your home, you’ll need to know how much you still owe on your mortgage and how much your home is currently valued at. When applying for a home equity loan, most lenders will require that you have a minimum of 15%-20% equity.
To determine your home’s value, you’ll need to have your home appraised. This involves hiring a licensed appraiser to conduct a full home inspection. They’ll consider various factors like the condition of your property, upgrades or additions you’ve made, the size of the property, and more to get the appraisal value.
The cost for a home appraisal is anywhere from $200-$600, depending on the size of your home, location, and the home’s condition, among other factors.
Tips on securing the maximum appraisal value
- Resolve minor fixes: Finishing those minor fixes around the home can be a low-cost and low-effort way to increase the value of your home.
- Improve curb appeal: Your home’s exterior plays a key role in its overall value since it gives a first impression. There are many affordable ways to improve a home’s curb appeal without breaking the bank or investing a significant amount of time, like clearing clogged gutters, keeping the lawn maintained, and so on.
- Consider making small cosmetic upgrades: A new layer of paint, replacing old fixtures with new ones, and other small upgrades can make a big impact on the value of your home.
- Have documentation of your upgrades: Document any updates you make to your property and hang on to contractor invoices. This can be used to show the appraiser the value you’ve added.
- Clean your home: Ensuring your home is spotless when an appraiser visits will help improve the ranking for your home’s overall condition. A dirty home can affect the appraiser’s perception of the value of your home, so make sure it’s clean.
How to find home equity loan providers?
While you can take out a home equity loan through traditional lending institutions, like banks and credit unions, expanding your search to also include online-only lenders will help you find the suitable rates.
While most lenders have a similar set of requirements, like verifiable employment and income, access to tax records, and sufficient equity in your home, other factors will vary from lender to lender, like interest rates, fees, and credit score minimum. Shop around and compare lenders to find rates.
Home equity loan lending partners
Let’s take a look at a few of our partner lenders currently offering home equity loans at competitive rates.
Quicken Loans
Quicken Loans is possibly the biggest contender in the home loans sector, certainly the biggest Federal Housing Administration-backed one. The company launched an online loan process, known as Rocket Mortgage, for a faster and more streamlined process than the traditional in-person method for mortgage loan applications.
Amerisave
Amerisave is a direct mortgage lender offering several types of loans, including conventional, jumbo, VA, FHA, USDA, fixed, adjustable, across both purchase and refinance. Licensed in 49 states, AmeriSave has been around since 2002 and has funded nearly $60 billion in mortgage loans.
LendingTree
LendingTree is a direct mortgage lender and a marketplace where you can compare other lenders. Leveraging its position as a top player in the industry, the website and lending platform has become a prominent resource for personal finance, offering a range of products and services to meet the diverse needs of its customers. With access to multiple mortgage offers from various lenders, customers can compare rates and terms to find the most suitable mortgage option for their needs.
Home equity loan alternatives
Aside from a home equity loan, there are two other ways to turn your home equity into cash—a home equity line of credit (HELOC) and cash-out refinancing. One key similarity between all three of these options is that you’re using your home as collateral.
HELOC
Similar to a credit card, a HELOC is a revolving line of credit that you can use as needed to borrow against the equity of your home (up to a certain amount). Unlike a home equity loan, HELOCs typically have variable interest rates and the payments aren’t fixed.
Cash-Out Refinance
This is another way to borrow against your home’s available equity. The big difference between a cash-out refinance and a home equity loan or HELOC is that this option involves paying off your existing mortgage, resulting in a new mortgage with different terms, like a different interest rate or monthly payment.
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