Own your own home? In need of cash to pay for a renovation, medical expenses, college tuition, or some other major expense? You may be able to use a home equity loan or home equity line of credit (HELOC) to tap into your equity to access funds.
Because the borrower’s home is used as collateral, a home equity loan usually has lower rates and more flexible qualifying requirements than other alternatives such as personal loans. The repayment terms often last for up to 15-30 years, giving you plenty of time to pay off the debt.
Here’s everything you need to know about home equity loans and HELOCs, including our list of the top 3 home equity lenders in 2021.
A home equity loan is a fixed-rate loan in which the borrower uses their home equity as collateral. The loan creates a lien against the borrower’s home and reduces the borrower’s home equity. As the borrower makes payments, their home equity increases again. A home equity loan term can range from 5-30 years although most lenders allow 5-15 years.
A home equity line of credit, or HELOC, is an alternative home equity product. Like a home equity loan, a HELOC uses the borrower’s home equity as collateral. But in contrast to a home equity loan, a HELOC is an open-end revolving line of credit with an adjustable interest rate. With a HELOC, the borrower may draw funds at any time, up to the approved credit limit. The borrower only pays principal and interest on the funds drawn, in addition to certain closing fees at the start of the loan.
The basic requirement of a home equity loan is that you own your home. Most lenders permit a combined loan-to-value (CLTV) ratio of up to 90%, meaning your home equity cannot go below 10% of your home’s current appraised value. However, some credit unions allow 100% CLTV. Generally, home equity loans can only be taken on owner-occupied properties, although in some cases it may be possible to use a rental or investment property as collateral.
Applying for a home equity loan or HELOC is quite similar to applying for a regular mortgage. It typically involves:
- A credit check, although your score may have a lesser impact on your lender’s decision than it would for a regular mortgage or an unsecured loan;
- A home appraisal, to help the lender calculate your current home equity and potential loan-to-value ratio; and
- Assessment of financial documentation, in order to calculate your debts and income.
Closing costs for home equity loans and home equity loans can reach up to 2-5% of the loan amount. Many home equity lenders are open to negotiating the closing costs, so always shop around before making a decision.
Home equity loans offer many benefits compared to alternative products. The average interest rate on a home equity loan in 2021 is 3-5%, substantially lower than the average personal loan rate of 10-20%. Although cash-out refinances are available at slightly lower rates, home equity loans usually have lower closing costs – making them the best option for tapping into your home equity for modest loan amounts. Home equity loans come in many shapes and sizes, so always compare a few lenders before making a final decision.
- Offers Fannie Mae 3% down conventional loans
- Loan experts are on hand to assist at any time
- Full suite of non-conventional loans
- Rates not advertised publicly
- No weekend phone hours
- Not licensed in NY
AmeriSave Mortgage Corporation is a direct mortgage lender operating in 49 states and DC. Since 2002, it has financed more than $220,000 homes to the tune of $52 billion in funding. It is known for its competitive rates and streamlined application, with approvals in as quickly as 25 days. It offers a wide range of loans, making it a good choice for anyone looking to purchase a home or refinance their mortgage.
- Pre-approval letter in as little as 3 minutes
- Rate lock in as little as 30 minutes
- 3-6 weeks to close – faster than industry average
- No FHA or VA loans
- Not available in HI, MA, MN, NV, NH, VT (as of March 2021)
Better.com is a direct lender with a simple online application that can be completed any time, any day of the week. Better.com aims to revolutionize the way Americans get a mortgage – after completing an application, you can access personalized rates, talk to a dedicated non-commissioned Mortgage Expert, generate custom loan estimates, and search for mortgage discounts in your area
Better has automated much of the mortgage process. This drastically reduces the cost to originate and allows Better to pass as much of those savings as possible onto the customer and invest in customer satisfaction. Better.com was recently named Best Mortgage Lender for Customer Service by Nerdwallet.
Last but not least, rates at Better.com are backed by the Better Price Guarantee, which promises that Better won’t just match a competing price, but beat it by $1,000.
- 100% online application (in most cases)
- Quick pre-approval and closing times
- Flexible repayment terms (8-29 years)
- No branches
- Lack of support for self-employed borrowers
- Your data may be shared across Quicken partners
If you’re looking for an easy and comfortable loan, QuickLoans can help. Not only do QuickenLoans help ensure you get a mortgage that’s right for you to save time, but the platform ensures you are aware of your loans status 24/7 so you can keep track of what is required of you and what has already been done to avoid repeating steps that have already been completed, saving you time and confusion.