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If you’ve spent years building equity in your home, there may be a way to tap into that value and turn it into cash.
We’re talking about a home equity loan, which is not to be confused with home equity lines of credit, or HELOCs, though there are similarities. You can use the money from a home equity loan for anything you want: home renovations, emergency costs, tuition.
These loans can be good options for homeowners looking to leverage their home equity, but keep in mind they are secured loans for which your home is the collateral. That means if you default on paying back the loan amount, you could lose your house.
While home equity loans are more difficult than usual to access right now because of the economic recession brought on by the pandemic, there are still options available.
Here’s Where to Start:
- Best home equity loan rates
- How does a home equity loan work?
- Pros and cons of home equity loans
- How to apply for a home equity loan
- Home equity loan vs. HELOC
- Alternatives to home equity loans
Best Home Equity Loan Rates
For banks that still offer them, there will be stricter requirements on your credit score and how much equity you need to have in your home. And as with any lending, those with the best credit score will qualify for the best rate. Here are the best rates we could find at lenders still offering home equity loans:
|Lender||APR||Loan Amount||Loan Length|
|Regions Bank||3.25% – 11.625%||$10,000 – $250,000||7, 10 or 15 years|
|Connexus Credit Union||3.49% – 15.9%||$5,000- up to 90% of home equity||60 – 240 months|
|DCU||3.74% – 5.49%||N/A||5 – 20 years|
|Discover||3.99% – 11.99%||$35,000-$200,000||10, 15, 20, or 30 Years|
|U.S. Bank||3.90%||$50,000-$99,999||up to 30 years|
|BBVA||4.04% – 9.09%||$10,000-$125,000||5 – 30 years|
|Frost Bank||4.24% – 5.49%||$2,000-$500,000||7 – 20 years|
|BMO Harris||4.54% – 7.49%||$25,000-$150,000||5 – 20 years|
|Citi||6.59% – 8.54%||N/A||5, 10, 15, 20, 25, or 30 years|
This list does not represent the entire market. To rank the home equity loan rates you’re most likely to consider, we began by analyzing 18 of the most popular home equity loan options.
We eliminated any lenders that don’t make information on rates and fees easy to find on their websites, or that have stopped offering home equity loans at this time.
The APRs shown above are accurate as of Jan. 6, 2020. They are the only APRs openly available among the lenders we assessed. The NextAdvisor editorial team updates this information regularly, though it is possible APRs have changed since they were last updated.
Home Equity Loan Rates Today
The pandemic has made it harder to qualify for a home equity loan.
“Borrowers are going to need more equity that they wouldn’t have needed prior to the pandemic. And the reason for that is to mitigate risk from the lender’s perspective,” says Greg McBride, chief financial analyst at Bankrate.
Lenders are more wary of risk during a recession. The most risky investments for lenders are unsecured debts, like credit cards, or second-lien secured debt, which includes home equity loans. A second lien position means the lender will get paid second if a person defaults on their payments.
With a house, the mortgage lender would be in the first lien position, and that’s why second lien lenders “get squeamish when the economy goes into the tank,” McBride says. But, “It’s important to emphasize that it’s not like home equity borrowing is shut off altogether, it’s just that they’re tighter.”
How Does a Home Equity Loan Work?
A home equity loan is a fixed-rate loan secured by your home. You’ll get a lump sum payment upfront and then, just like your mortgage, you’ll repay the loan in equal monthly payments over a period of time. Because your house is used as collateral, the lender can seize it if you default.
Home equity is the difference between the value of your home and what you owe on the mortgage. A home equity loan lets you borrow against that equity, and the more equity you have, the more you can borrow. You can usually borrow up to 85% of your home equity, according to the Federal Trade Commission.
Home equity loans usually have anywhere from 5- to 30-year terms and come with a fixed interest rate, meaning whatever rate you lock in at the beginning of the loan term will remain throughout its duration. Loan APRs have come down this year as interest rates have fallen, but “not in lockstep,” says McBride.
Still, if you qualify for a home equity loan right now, it’s a good time to get one since interest rates are low.
What to Use A Home Equity Loan For
A home equity loan is something to consider if you need a large sum of cash up front, like if you’re paying for a large home renovation project or debt consolidation.
“If someone wants to consolidate debt they may choose the home equity loan because it’s going to pay off all the debt that they want to consolidate in one loan in one fell swoop,” says McBride.
While it’s important to consider the ramifications of debt consolidation that trades unsecured debt (like credit card debt) for a new secured home equity loan (which puts your house on the line if you default), it could make sense if you can get a much lower interest rate that allows you to pay it off faster.
Pros and Cons of Home Equity Loans
One lump sum payment of total loan amount upfront
Fixed-interest rate, meaning you won’t have to worry about your rate fluctuating over the repayment period
Typically lower interest rate than on other loans like credit cards or personal loans
No stipulations about what you can use the money for
Your home is used as collateral, meaning it can be taken from you if you default on the loan
If your still paying off your mortgage, this loan payment will be on top of that
Home equity loans can come with closing costs and other fees
May be harder to qualify at the moment if you don’t have good credit or enough home equity
How to Apply for a Home Equity Loan
Before you apply for a home equity loan, you’ll want to know your credit score and your home equity stake. If your credit score isn’t the best you might not qualify for a home equity loan, especially right now. A common baseline for a home equity loan is 680, but the higher your score the lower your interest rate will be.
Applying for a home equity loan is simple: go to your chosen lender’s website and fill out the application. You’ll want to have an idea of how much you want the loan to be for ahead of time.
As stipulations for getting a home equity loan have tightened, you may need to consider looking at banks or credit unions you already have accounts with as some banks have decided to only work with existing customers.
Home equity loan vs. HELOC
Another common type of home equity financing is a home equity line of credit (HELOC). HELOCs are not a traditional loan where you get paid a lump sum up front, but work more like a credit card secured by your home. A HELOC is a revolving line of credit, so you only have to pay for what you spend, plus interest. HELOCs are similarly more difficult to get approved for at the moment.
|Home Equity Loan||HELOC|
|Fixed-term loan||Revolving credit line|
|Fixed APR||Variable APR (usually)|
|Pay full loan amount||Pay only what you spend|
|Home used as collateral||Home used as collateral|
|Funds for as long as they last||Set draw period|
|Lump sum at onset of loan||Ongoing cash|
|Interest can be deducted for home projects||Interest can be deducted for home projects|
Alternatives to A Home Equity Loan
If you can’t access a home equity loan or a home equity line of credit right now, you might consider these other options:
Cash-out mortgage refinancing
A cash-out refinance is when you pay off your existing home loan by getting a new one that’s larger than what you currently owe, and get a check for the difference.
“In the instance where people are tapping equity out of their home, they’re predominantly doing that through the cash-out refinance because mortgage rates have fallen to record lows,” McBride says. “A lot of people are in the position where they can profitably refinance their mortgage and so that becomes the avenue through which they can access their home equity.”
A personal loan lets you borrow a fixed sum of money for a fixed interest rate to be paid over a fixed period of time.
A reverse mortgage is a loan that allows seniors to turn the value of their homes into cash during their retirement years. They are also known as home equity conversion mortgages.