Home equity loans allow homeowners to borrow against the equity in their homes to fund home improvement projects or pay off or consolidate high-interest debt. Forbes Advisor compiled a list of home equity lenders that excel in various areas including offering low fees, low loan costs, convenience and flexibility, so there’s something for people with different goals and financial needs.
Tips for Comparing Home Equity Loans
There are a few ways you can access the equity in your home without selling it:
- What is a home equity loan?
- What is a home equity line of credit? (HELOC)
- When to use cash-out refinancing
There are key differences between these three loan types, so it’s important to understand what they are so you can choose the loan that best fits your financial needs.
Borrowing against your equity can be set up as a loan (home equity loan)—where you receive one lump sum and repay it with interest over time—or a line of credit (home equity line of credit, or HELOC) that you can access over a certain period of time.
A home equity loan is a good option if you know how much you need to borrow, if, for example, you’re consolidating debt. A HELOC is a good option for uses like construction or home renovations, as these costs can change over time. The HELOC allows you to use as much or as little of the credit as you want and you can continue to borrow as you pay down the principal. Both of these options require you to get a second mortgage on your house.
If you’re still paying off your primary mortgage, then this new mortgage would be in the second position. This means it’s second in line to being paid back when you sell your house or if your home were to go into foreclosure. For this reason, home equity loans and HELOCs are often harder to qualify for than cash-out refinancing.
A cash-out refinance replaces your original mortgage with a new, bigger one. Since you’re borrowing money against the equity, that amount is rolled into your new mortgage. So you would pay your principal balance and your equity loan amount in one payment. Lenders loosen credit requirements on cash-out refinances because they’re in the first position—or first in line—to get paid back, which is optimal.
Like a mortgage to purchase a home, equity borrowing involves shopping for interest rates.
Since comparison shopping often leads to lower interest rates, be sure to collect as much information as you can. You can use a loan estimate from one lender to potentially negotiate a lower rate with another lender.
PNC Bank
| PREAPPROVAL TIME | MORTGAGE RATES | DAYS TO CLOSE |
|---|---|---|
| 20 to 30 minutes | Lower than the national average | Average closing time is 45 days |
Bank of America
| PREAPPROVAL TIME | MORTGAGE RATES | DAYS TO CLOSE |
|---|---|---|
| Preapproval letter takes 10 days to receive | Lower than the national average | Average closing time is 45 days |
LoanDepot
| PREAPPROVAL TIME | MORTGAGE RATES | DAYS TO CLOSE |
|---|---|---|
| 15 minutes | Within 1 to 3 basis points above or below the national average | 20 days |
Tips for Comparing Home Equity Loans
There are a few ways you can access the equity in your home without selling it:
- What is a home equity loan?
- What is a home equity line of credit? (HELOC)
- When to use cash-out refinancing
There are key differences between these three loan types, so it’s important to understand what they are so you can choose the loan that best fits your financial needs.
Borrowing against your equity can be set up as a loan (home equity loan)—where you receive one lump sum and repay it with interest over time—or a line of credit (home equity line of credit, or HELOC) that you can access over a certain period of time.
A home equity loan is a good option if you know how much you need to borrow, if, for example, you’re consolidating debt. A HELOC is a good option for uses like construction or home renovations, as these costs can change over time. The HELOC allows you to use as much or as little of the credit as you want and you can continue to borrow as you pay down the principal. Both of these options require you to get a second mortgage on your house.
If you’re still paying off your primary mortgage, then this new mortgage would be in the second position. This means it’s second in line to being paid back when you sell your house or if your home were to go into foreclosure. For this reason, home equity loans and HELOCs are often harder to qualify for than cash-out refinancing.
A cash-out refinance replaces your original mortgage with a new, bigger one. Since you’re borrowing money against the equity, that amount is rolled into your new mortgage. So you would pay your principal balance and your equity loan amount in one payment. Lenders loosen credit requirements on cash-out refinances because they’re in the first position—or first in line—to get paid back, which is optimal.
Like a mortgage to purchase a home, equity borrowing involves shopping for interest rates.
Since comparison shopping often leads to lower interest rates, be sure to collect as much information as you can. You can use a loan estimate from one lender to potentially negotiate a lower rate with another lender.
Advantages of Home Equity Loans
- Tap into your home’s equity. A home equity loan allows you to access built-up equity in your property and turn it into cash.
- Use for almost any expense. You can use the funds from a home equity loan to cover almost anything you’d like, such as education expenses, renovations, medical bills and more.
- Fixed rates. Home equity loans usually come with fixed rates, which means your payments will stay the same throughout the life of the loan.
Downsides to Home Equity Loans
- Acts as a second mortgage. If you take out a home equity loan and haven’t paid off your first mortgage yet, you’ll have to make payments on both loans at the same time.
- Can’t reborrow against the loan. If you end up needing more money than you expected, you’ll have to get another loan.
- Risk of foreclosure. If you can’t keep up with your home equity loan payments, you risk losing your house.
Home Equity Loan Requirements
Eligibility requirements for a home equity loan vary from lender to lender. However, all lenders look for responsible, low-risk individuals.
These are generally the benchmarks that most lenders expect borrowers to meet:
- 620 credit score (some lenders may require a minimum of 680)
- Proof of stable and sustainable income from the past two years
- At least 80% equity in your property
- Debt-to-income (DTI) ratio no higher than 43%
- Excellent financial history
- Proof of homeowners insurance
