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How do Home Equity Loans Function

Where You Can get a Home Equity loan

What to look for

Mortgage FAQs for Home Equity

The Bottom Line

Home Ownership Home Equity

How to get a Home Equity loan

They’re readily available, but it pays to shop for them

Rae Hartley Beck Rae Hartley Beck

Updated August 31, 2022

Reviewed by Doretha Clemon

Fact checked by Melody Kazel

Home equity loans are available in more places than you might believe. This article explains where to find home equity loans and how they function and how you can make sure you’re getting a top-quality one.

Important Takeaways

You can take out a home equity loan through a credit union, bank, or specialized lender.

A good home equity loan should have no or minimal fees, a low variable interest, zero penalties for prepayment and clear terms.

The best way to compare the costs of different loans is by checking their annual percentage rates (APR).

Check to see if any lender you’re considering is legitimate and authorized to conduct business in the state you reside in.

How do Home Equity Loans Work

A home equity loan lets you borrow against the equity that you’ve built up within your house. The loan is a lump-sum payment , which you return over time in equal monthly installments generally at a fixed rate rate.1

Where Can You get a Home Equity Loan

Home equity loans are available from a number of the same lenders who provide regular mortgages. If you are a member of an institution like a credit union, it will likely offer an equity loan option that comes with competitive rates and charges. Alongside credit unions, many banks offer no- or low-cost home equity loans. There are also lenders that are specialized in residential equity loans.

When you have a few potential candidates, make sure to get estimations from all lenders, so that you can conduct some comparison shopping. This includes loans charges, terms, and fees as well as annual percentage rates (APRs). It is recommended to use the APR when comparing costs in order to make the most accurate comparison.

Mortgage lending discrimination is illegal. If you believe you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance and/or disability, national origin, or the age of your child there are steps you can take. One of them is to file a claim with the Consumer Financial Protection Bureau (CFPB) or the U.S. Department of Housing and Urban Development (HUD).2

What to look for in an Equity Loan for your Home? Equity Loan

First, make sure that any lender you are contemplating is legitimate. The lender ought to be in a position to give you their Nationwide Multistate Licensing System (NMLS) number.3 You can search for it on the NMLS Consumer Access website to verify that it is registered to conduct transactions in the state you reside and determine if any complaints have been filed against it.4

Once you’ve determined that you’re dealing with legitimate lenders, here are the most important aspects to look at in home equity loans.

No prepayment penalty: Especially with more expensive interest rates, it’s best to have to be able to pay off your home equity loan ahead of schedule without penalties or fees to do this. Making the home equity loan faster than simply making the minimum payments can help you save thousands in interest. It will also free up your equity, making you less likely to become in debt if the value of your home falls.

Free or minimal fees: There are many home equity loan options with zero fees or fees that are extremely low. This can help you save a significant amount of money upfront when you get the loan or pay off interest over the life of the loan in the event that you combine the charges into the loan.

A low interest rate Lower interest rates will make a huge difference of money over the duration of your loan. As mentioned above, the rate you want to focus on is the APR, which takes the account both the base interest rate and additional fees providing you with the most accurate idea of what the loan is actually going to cost you.

Fixed interest rate A fixed interest rate: Although most home equity loans offer a fixed rate of interest rate, not all of them have. You should make sure that you sign up for one that has a fixed rate so you aren’t surprised by an increase in the amount of your payment in the future.

Transparency The home equity loans must provide clear and concise information prior to and during loan signature, which includes the loan amount APR, interest rate, fees, penalties for prepayment, as well as the loan term (length). Each of the home equity loans should provide clear and concise information in accordance with the TRID (TILA-RESPA Integrated Disclosures) rule.5

What Are the Risks of a home Equity loan?

The home equity loan uses you home’s value as collateral to give you a lower interest rate that you can get with unsecure debts like credit cards or a personal loan. In the end, you may lose your home if aren’t able to make the payments. Another major risk associated with the home equity loan is when you use too much equity and the value of your home declines. When this happens you may end up being in debt on your loans, meaning that you owe more on your home than what it’s worth. That, in turn, may prevent you from selling the house until its value increases or you’ve paid off your loans in a sufficient amount, which can take years.6

What Are the Alternatives to a Home Equity Loan?

The best alternative to an equity home loan could be a robust emergency fund or budgeting and making a plan to save in advance to cover future expenses you would otherwise use a home equity loan for. When saving in advance isn’t feasible or not feasible, a 0% APR credit card or a personal loan are both alternatives that don’t risk your home if you can’t afford to pay them back.

What Are the Requirements for obtaining a home Equity Loan?

To be approved for the home equity loan you must have a good rating on your credit, lower debt-to-income ratio, a verified income history showing you’ll have enough income to repay the loan as well as a loan-to-value ratio of 90% or less.789

The Bottom Line

A home equity loan is a simple way to borrow money at an interest rate that is low however, in the process you’re risking your home. If you are looking for a home equity loan, look for an option that will save you the most money and allow you to pay off the loan early if you’re in a position to.