How Home Equity Loans Work
Where You Can Get a Home Equity loan
What to Look For
Questions about Home Equity Loans
The Bottom Line
Home Ownership Home Equity
How do I get a Equity Loan for your Home? Equity Loan
They’re widely available, buy it pays to shop for them
By Rae Hartley Beck
Updated August 31, 2022
Review by Doretha Clemon
Fact checked by Melody Kazel
Home equity loans are more readily available in places than you’d think. This article will explain where you can locate home equity loans and how they operate and how to ensure you’re getting a high-quality loan.
Key Takeaways
You can obtain a home equity loan through a credit union, bank or a lender that is specialized.
A quality home equity loan should not have any or low charges, a variable interest, zero penalties for prepayment, and transparent the terms.
The most effective way to compare the cost of different loans is to check their annual percentage rates (APR).
Make sure you verify that any lender you’re considering is legitimate and is licensed to conduct business in the state you reside in.
How do Home Equity Loans Work
The home equity loan allows you to take out a loan against the equity you’ve accumulated in your home. You receive a single lump-sum payment that you then pay back over time in equal monthly installments, typically at a fixed interest rate.1
How to Get a Home Equity Loan
Equity home loans are available from a number similar lenders who provide regular mortgages. If you’re a member of the credit union, it’ll most likely offer a home equity loan option that comes with competitive rates and charges. Alongside banks, credit unions offer no- or low-cost home equity loans. There are lenders who focus on home equity loans.
When you have a few possible candidates in mind, make sure to obtain an estimate from every lender so you can conduct some comparison-shopping. This includes loans’ costs, terms, fees, and annual percentage rates (APRs). It is recommended to use the APR when comparing costs in order to make the most precise comparison.
The practice of discrimination in lending to mortgages is unlawful. If you feel you’ve been discriminated against based on religion, race or sex, marital status, use of public assistance, national origin, disability, or the age of your child there are steps you can take. One of them would be to submit 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 the Equity Loan for your Home? Equity Loan
The first step is to ensure that the company you’re considering is legitimate. The lender ought to be in a position to give you the Nationwide Multistate Licensing System (NMLS) number.3 You could use this number to search for it on the NMLS Consumer Access page to confirm that the lender is properly registered to do commercial transactions within your particular state and determine if any complaints have been made against it.4
If you’ve decided that you’re working with a legitimate lender These are the top features to look for in their home equity loans.
There is no penalty for prepayment: Particularly with the rising interest rates, it’s best to have the option to pay on your equity home loan in advance, without penalties or fees for doing so. Paying off your home equity loan quicker than making the minimum amount of payments could help you save thousands in interest. It will also free up your equity, which makes your home less likely to fall financially insolvent if your home’s value falls.
Low or no fees: There are numerous home equity loan alternatives that come with no fees or fees that are extremely low. This can make it possible to save a substantial amount of cash upfront before you take out the loan–or reduce the amount of interest you pay over the life of the loan when you incorporate the charges to the loan.
A low rate of interest: An interest that is lower can help you save a substantial amount in the course of your loan. As mentioned above, the rate you should concentrate on is the APR, which takes into consideration both the interest rate as well as additional charges providing you with the most accurate image about what the loan will actually cost you.
A fixed interest rate: Although the majority of home equity loans have a fixed interest rate, not all of them offer. You should make sure that you sign up for one that has an interest rate that is fixed so you don’t get caught off guard by an increased payment amount later on.
Transparency The home equity loans should provide clear information prior to and at loan signing including the loan amount APR, interest rate and fees, as well as any prepayment penalties, and the loan period (length). All home equity loans must provide clear 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 makes use of the home’s equity as collateral, which gives you a better interest rate than what you would get from other debts that are not secured, such as credit cards or personal loan. This means that you could end up losing your property if cannot pay the repayments. Another major risk associated when you take out a home equity loan can occur if you tap too much equity, and the value of your home decreases. When this happens you may end up being under-indebted on your loans which means that you have more debt on your home than it’s worth. That, in turn, could hinder you from selling your home until it is worth more or until you’ve paid off your loans enough, which could require years.6
What Are the Alternatives to a home Equity loan?
The best alternative to an equity home loan can be a solid emergency fund, or budgeting and planning ahead to cover future expenses you could otherwise take advantage of a home equity loan for. When saving money in advance isn’t feasible, a 0% APR credit card or a personal loan are options that won’t put your home at risk when you’re unable to pay back the loan.
What are the prerequisites for obtaining a home Equity Loan?
To get a home equity loan you must have a good credit rating, low debt-to income ratio, a verifiable income history that proves you’ve enough money to repay the loan as well as a loan-to-value ratio of 90 percent or less.789
The Bottom Line
A home equity loan is an effective method of borrowing money with a relatively low interest rate, but in the process you’re putting at risk your home. If you are looking for a home equity loan, look for an option that will help you save the most as well as give you the flexibility to pay off your loan in a timely manner if you are in a position to.
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