Home equity loans have become a popular way to pay for big expenses like home renovations, college tuition, and debt consolidation. If you’re thinking of tapping into the equity you’ve accumulated in your home, here’s what you need to know about finding a home equity loan.
Key points to remember
- Home equity loans can be relatively easy to get if you have enough equity in your home and meet other conditions.
- The main disadvantage of a home equity loan is that your home will be at risk if you cannot keep up with the payments.
- Before shopping for a loan, decide how much you need to borrow and how long you want to take to pay it back.
- To compare the cost of home equity loans from different lenders, find out the annual percentage rate (APR) of each loan.
Before shopping for a home equity loan
You can simplify your search for a home equity loan if you make some key decisions beforehand.
1. Decide if a home equity loan is your best option
Like any type of borrowing, home equity loans have their pros and cons. On the plus side, if you have enough equity in your home, a reliable income, and a good credit rating, they can be relatively easy to get. They can also offer relatively low interest rates compared to some other types of loans. They are, on the other hand, secured by your home, and if you can’t repay the loan for one reason or another, you could end up on the streets.
Before committing to a home equity loan, be sure to consider the alternatives, especially if you have concerns about your ability to repay. For example, you may qualify for an unsecured personal loan from a bank or credit union. He might have a higher interest rate, but you won’t be putting your house at risk. You may also be able to get a personal loan faster.
If you’re looking to borrow money for your college education, federal student loans should be at the top of your shopping list. These loans are unsecured, have relatively low interest rates, and offer a variety of flexible repayment plans.
And while a home equity loan can be a cost-effective way to consolidate and pay off high-interest credit card debt, you’ll be trading unsecured debt for debt secured by your home. Another option, if you qualify, would be to transfer your card debt to a new credit card with an attractive balance transfer offer, such as 0% interest for six to 18 months, then repay it as aggressively as possible.
Another way to tap into the equity in your home is through a cash refinance. In a cash-out refinance, you take out a new mortgage large enough to pay off your old mortgage and provide you with additional cash to use as you see fit. However, be sure to compare the interest rates of old and new loans before committing. In times of rising interest rates (like the middle of 2022), you probably don’t want to give up a low-interest mortgage to take more debt at a higher rate.
2. Decide how much loan you need
If you’ve determined that a home equity loan is your best option, the next question is how much you want to borrow. Again, because you’ll be putting your home at risk, it’s best not to borrow more than you really need, even if the lender is willing to offer you more.
Lenders set limits on how much loan they will give you, based on your home equity, income and creditworthiness. Typically, they can cap their loans at around 80% of your capital. Most lenders also set minimum amounts for their home equity loans, often $10,000 or more.
Since your creditworthiness will also be in the equation, it’s worth checking the accuracy of your credit reports before applying for a loan. You can get free copies from each of the three major credit bureaus at AnnualCreditReport.com, the official website for this purpose. If you find errors that put you in a bad light, like unpaid bills you know you paid or accounts you don’t even recognize, dispute them with the credit bureau.
If you’re unsure how much money you need to borrow, such as if you’re embarking on a multi-stage home improvement project, you may want to consider a home equity line of credit (HELOC) instead. than a home equity loan. It lets you borrow up to a certain limit over a period of time, and you don’t have to borrow the full amount. However, HELOCs usually have variable interest rates, so if rates go up, so will your borrowing costs.
3. Decide on the repayment term you want
Lenders offer a variety of repayment terms for home equity loans. You can get one that you pay back over five years, 10 years, 15 years or more. The shorter the repayment period, the higher the monthly payments. But a shorter repayment period generally means a lower interest rate as well as a lower total interest cost over the life of the loan.
When shopping for a home equity loan
Once you have an idea of the type of home equity loan you want, you are ready to buy one. You can get a home equity loan from a bank, credit union, or online lender. A good starting point might be a financial institution where you already do business. But don’t stop there.
You’ll be safer with a lender whose name you recognize. Be especially wary of unsolicited home loan offers that come to you by mail, email or phone.
To compare the cost of home equity loans of the same term, ask about their annual percentage rates (APR). The APR should incorporate not just the interest rate of the loan, but any additional costs, such as points and fees. Note that the lender may have some flexibility in these fees, so feel free to try to negotiate a better rate.
In order to get a quote from a lender, you will need to provide some basic information about:
- Your home, including its purchase price and estimated current value
- Your estimated income from work and other sources, such as investments
- Any other debt, such as credit cards and your current mortgage, if you have one
If you decide to go ahead and submit an application, you will need to provide additional information and documentation to verify all of the above, as well as proof that you have paid your property taxes and have the appropriate insurance for your home. For example, the lender is likely to request copies of your pay stubs, W-2 forms and 1099-DIV statements, tax returns, bank statements, etc.
During the application process, the lender will most likely appoint a professional appraiser to assess the current market value of your home.
Once your loan is approved, you will receive the money you requested in the form of a lump sum. The time this will take may vary from lender to lender and depending on the simplicity or complexity of your financial situation. Lenders generally estimate the waiting period between two weeks and a month or more. If you’re in a rush for the money, it’s worth asking before applying.
Is interest on home equity loans tax deductible?
It depends on how you use the money. Since the passage of the Tax Cuts and Jobs Act of 2017, interest on home equity loans and lines of credit are only deductible if they are used “to buy, build or substantially improve the house of the taxpayer who guarantees the loan,” the Internal said the revenue department. The rules may change in the future, however, as this provision of the law expires in 2026.
Can you refinance a home equity loan?
Yes, you can refinance a home equity loan. You might consider refinancing if you can get a lower interest rate or want to extend your repayment period. However, check to see if your current home loan imposes a prepayment penalty if you pay it off before the end of its term.
Can you get out of a home equity loan if you change your mind?
Yes, but you have to be quick. If you sign up for a home equity loan but change your mind, you usually have three business days to cancel without penalty. Saturdays count as working days, but Sundays do not.
A home equity loan can be a convenient source of cash to cover major expenses. However, you may have better alternatives. To buy a home equity loan, compare annual percentage rates on loans of the same term and find out about prepayment penalties in case you want to pay the money back sooner.