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How do Home Equity Loans Work

How to get a Home Equity loan

What to Look for

Mortgage FAQs for Home Equity

The Bottom Line

Equity in Homeownership Equity

How do I 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

The home equity loans are available in more places than you’d believe. This article will explain where you can find home equity loans, how they work and how to ensure you’re getting a top-quality one.

Key Takeaways

You can get a home equity loan from banks, credit unions, or specialized lender.

A quality home equity loan will have no or minimal fees, a low percentage of fixed rate interest and no penalties for prepayment, and transparent conditions.

The best method to evaluate the costs of different loans is to check their annual percentage rate (APR).

Make sure you verify that any lender you’re considering is legitimate and authorized to conduct business in your state.

How do Home Equity Loans work

A home equity loan allows you to borrow against the equity you’ve built up in your home. You receive a single lump-sum payment that you then pay back over time in equal monthly installments generally at a fixed rate rate.1

Where Can You take out a home Equity Loan

Equity home loans are available from a number similar lenders that provide regular mortgages. If you’re a member of an institution like a credit union, it’ll most likely provide a home equity loan option that is competitive in rates and fees. In addition to banks, credit unions provide low- or no-cost home equity loans. There are also lenders that are specialized in residential equity loans.

If you’ve got a few possible candidates in mind, make sure to obtain estimations from all lenders, so that you can do some comparisons. That includes the loans charges, terms, and fees as well as annual percentage rates (APRs). You should use the APR when comparing costs to get the most accurate comparison.

The practice of discrimination in lending to mortgages is unlawful. If you think you’ve been discriminated against due to on religion, race, sex or marital status, usage of public assistance, national origin, disability or the age of your child, there are steps that you can take. One such step involves filing a claim to the Consumer Financial Protection Bureau (CFPB) or the U.S. Department of Housing and Urban Development (HUD).2

What should you look for in the Home Equity Loan

First, make sure that any lender you are contemplating is legitimate. The lender should 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 page to determine if it is properly registered to do commercial transactions within your particular state. You can also determine if any complaints have been brought against it.4

After you’ve confirmed that you’re dealing with legitimate lenders Here are the most important characteristics to be looking to find in the house equity loans.

Prepayment penalties are not a problem: In particular with more expensive interest rates, you’ll want the option to pay off your home equity loan ahead of schedule without any fees or penalties to do so. Making the home equity loan faster than simply making the minimum payment can reduce the cost of interest by thousands. It will also free up your equity, making it less likely that you will fall financially insolvent if your home’s value decreases.

No or low fees: There are many home equity loan options with zero fees or extremely low ones. This can help you save a significant amount of cash upfront before you take out the loan–or pay off interest over the course of the loan in the event that you combine the fees to the loan.

A low rate of interest: Lower interest rates will make a huge difference on the life of the loan. As mentioned above, the rate you want to focus upon is an APR. It takes consideration both the interest rate and additional fees, giving you the best idea of what the loan will actually cost you.

A fixed interest rate A fixed interest rate: Although most home equity loans have a fixed interest rate but not all offer. Make sure you’re signing up for one with a fixed rate so you won’t be surprised by an increase in the amount of your payment in the future.

Transparency: All home equity loans must provide clear and concise information prior to and during loan signing including the loan amount APR, interest rate charges, fees, any prepayment penalties, and the loan duration (length). Each of the home equity loans must be clear in accordance with the TRID (TILA-RESPA Integrated Disclosures) rule.5

What are the risks of a Home Equity loan?

Home equity loan uses the home’s equity as collateral, which gives you a better interest rate that you can get with unsecure debts like a credit card or a personal loan. This means that you may lose your home if you cannot pay the repayments. Another big risk with the home equity loan is when you use too much equity and the value of your home declines. When this happens it could result in you becoming underwater on your loans, meaning that you owe more on your home than it’s worth. That, in turn, could prevent you from selling the home until its value increases or you’ve paid off your loans sufficiently, which might require years.6

What Are the Alternatives to a home Equity Loan?

The best alternatives to a home equity loan could be an emergency fund or budgeting and making a plan to save in advance for the future costs you could otherwise take advantage of a home equity loan to pay for. When saving in advance isn’t feasible and you don’t have the money, a 0% interest credit card or a personal loan are two options that won’t put your home at risk when you’re unable to repay them.

What are the prerequisites to get a Home Equity Loan?

To get the home equity loan you’ll need to have a good credit rating, lower debt-to-income ratio, a verifiable income record that shows you have sufficient income to pay back the loan as well as a loan-to-value ratio of 90% or less.789

The Bottom Line

The home equity loan can be an easy option to get money at an extremely low interest, but in the process you’re putting at risk your home. When searching for the best home equity loan, look for one that will save you the most money and allow you to repay the loan earlier if you’re in a position to.

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