Home equity loans are a type of second mortgage that let you borrow against the equity in your home with a fixed interest rate and fixed monthly payment.
FAQs
If you have more questions or are still unsure about home equity loans, here’s a list of questions and answers to help you better understand these products.
What is home equity?
Your home equity is calculated by subtracting how much you still owe on your mortgage from the appraised value of your home. Home equity is one way to measure your personal wealth.
What is a home equity loan?
A home equity loan based on the equity of the borrower's home. Unlike a HELOC, you receive all of the money upfront and then make equal monthly payments of principal and interest for the life of the loan (similar to a mortgage).
What is a HELOC?
HELOC stands for home equity line of credit. It is a loan based on the equity of the borrower’s home. Similar to how a credit card works, it allows you to take out money and pay it back down at your own pace up to a certain amount during the draw period.
Where can I get a home equity loan or HELOC?
A variety of banks and lenders offer HELOC and home equity loans. Our storefront can help you target the best opportunities and rates in your area. It’s always a good idea to shop around with a few lenders to compare rates, fees and loan terms.
Why should I take out a HELOC?
A HELOC can be a good idea for a number of reasons. Maybe you need to fund a home improvement project or you might want to finance your education. It is also flexible, especially if you don’t need all the money upfront. A HELOC is not a good idea, however, if you aren’t in a position to repay it comfortably or if you use the money for disposable items that don’t enhance your financial position.
What is a HELOC draw period expiration?
The draw period expiration of a HELOC refers to a time when you can no longer draw any remaining loan amounts. This draw period expiration will vary based on the lender and the payment period you have signed on for. Some can last as long as 20 years. At the end of the draw period the facility converts to a fixed repayment schedule, like a mortgage, where you make equal monthly payments.
Is the interest paid on a home equity loan or HELOC tax-deductible?
Yes, so long as the HELOC is used for home-related investments (home improvements). Interest is capped at $750,000 on home loans (combined mortgage and HELOC/HE loan). So if you had a $600,000 mortgage and $300,000 HELOC for home improvements on a house worth $1,200,000, you can only deduct the interest on the first $750,000 of the $900,000 you borrowed.
If you are using a HELOC for any other purpose other than home improvement (such as starting a business or consolidating high-interest debt), you cannot deduct interest under the new tax law.
Bankrate's guide to home equity loans
- Today's home equity loan rates
- Best home equity loans of 2020
- Reasons to use home equity loans
- Pros and cons
- Alternatives to home equity loans
- How to apply for a home equity loan
- How to calculate home equity
- Home equity lender reviews
Current home equity loan rates
| Loan Type | Rate |
|---|---|
| Home Equity | 7.30% |
| Last update: 1/20/2020 12:00am | |
Home equity loan rate: As of Jan 20, 2020, the average Home Equity Loan Rate is 7.30%.
Best home equity loans of 2020
A variety of lenders offer home equity loans that let you borrow against your home’s value. These loans come with a predictable monthly payment and a fixed interest rate that will never change. However, some lenders offer better loan terms, lower rates or low fees that make them especially attractive. Current home equity loan interest rates range between 3.79% and 11.99% depending on the loan amount and creditworthiness. Our list of the best home equity loans for 2020 can help you decide which loan might work best for your needs.
- Best for low rates: PNC Bank - Current APR Range: 4.29% to 7.14%
- Best for high loan limits: Discover - Current APR Range: 3.99% to 11.99%
- Best for low fees: BMO Harris Bank - Current APR Range: 5.74% to 8.69%
- Best for homeowners with minimal equity: KeyBank - Current APR Range: as low as 3.79%
- Best for bad credit: Spring EQ - Current APR Range: starts at 4.99%
Best for low rates: PNC Bank
PNC offers home equity loans with lower interest rates than many of their competitors. This fact, coupled with their flexible loan terms, makes them a top lender for consumers who want to borrow against the equity in their homes without paying more interest than they have to.
Pros: Low fixed interest rates; receive a 0.25 percent rate discount with autopay on a PNC checking account
Cons: Rates may vary depending on where you live; some fees apply
| Lender | PNC Bank |
|---|---|
| Max LTV Ratio | 89.9% |
| Max Debt-to-Income Ratio | None |
| Min. Credit Score | None |
| Interest Rates | Fixed rates currently range from 4.29 percent to 7.14 percent but vary depending on loan amount |
| Loan Amount | Varies depending on your home equity |
| Term Lengths | Up to 30 years |
| Fees | Recording fees, property search fee, late fee up to 10 percent of the payment amount or $40, and returned payment fee of $30; appraisal fee may not usually required |
| Additional Qualifications | Need Social Security number, proof of income and government-issued ID to apply |
Best for high loan limits: Discover
While Discover is popular for their rewards credit cards, the bank also offers personal loans and home equity loan products. Its home equity loan is popular thanks to its combination of low fees and high loan limits. Make sure to see how home equity loans from Discover stack up before you decide on a lender.
Pros: High loan limits coupled with low interest rates and no fees
Cons: Best rates go to customers with excellent credit
| Lender | Discover |
|---|---|
| Max LTV Ratio | 90 - 95% |
| Max Debt-to-Income Ratio | None |
| Min. Credit Score | 620 |
| Interest Rates | Rates between 3.99 percent to 8.99 percent for first lien and 3.99 percent to 11.99 percent for second lien |
| Loan Amount | $35,000 to $200,000 |
| Term Lengths | 10 to 30 years |
| Fees | No origination fees, application fees, or cash required at closing |
| Additional Qualifications | Plan to share your personal details, Social Security number, proof of income, employment information, tax returns and pay stubs when you apply |
Best for low fees: BMO Harris Bank
BMO Harris Bank offers a home equity loan product with low loan minimums, low fees and a variety of term options. With so many ways to tailor your loan to your needs, a home equity loan from BMO Harris can be ideal for debt consolidation, home remodeling projects, a major purchase or any other financial need.
Pros: Low fees and low interest rates for those qualify; a 0.25 percent discount for autopay from a BMO Harris checking account is available
Cons: You can start your application online but must speak with a banker to get final approval
| Lender | BMO Harris Bank |
|---|---|
| Max LTV Ratio | Not disclosed |
| Max Debt-to-Income Ratio | None |
| Min. Credit Score | None |
| Interest Rates | Fixed rates currently range from 5.74 percent to 8.69 percent depending on the loan amount and your creditworthiness |
| Loan Amount | From $5,000 to $150,000 |
| Term Lengths | Up to 20 years |
| Fees | BMO Harris may pay many of your closing costs |
| Additional Qualifications | Need Social Security number, proof of income and government-issued ID to apply |
Best for homeowners with minimal equity: KeyBank
When you don’t have a lot of equity in your home, it can be difficult to find a lender willing to extend you credit. Fortunately, KeyBank lets consumers borrow up to 100 percent of their home’s value in a first and second mortgage if they qualify. Flexible terms also apply, making this bank a solid choice.
Pros: Borrow up to 100 percent of your home’s value; terms available up to 30 years
Cons: A $125 origination fee applies
| Lender | KeyBank |
|---|---|
| Max LTV Ratio | 100% |
| Max Debt-to-Income Ratio | None |
| Min. Credit Score | None |
| Interest Rates | Rates vary around the country but can be as low as 3.79 percent if you only want to borrow up to 85 percent of your home’s value; higher rates apply when you borrow up to 100 percent of the value of your home |
| Loan Amount | $10,000 to $249,000 |
| Term Lengths | 1 to 30 years |
| Fees | Fees that may apply include an origination fee, title insurance, closing fees and mortgage tax |
| Additional Qualifications | Need to be 18, provide proof of income and live in AK, CO, CT, ID, IN, MA, ME, MI, NY, OH, OR, PA, UT, VT or WA |
Best for bad credit: Spring EQ
Spring EQ offers home equity loans to consumers with a minimum credit score of just 640. Generous loan terms are offered, as well as the ability to get funding in as little as 14 days. If your credit isn’t great but you want to borrow against the value in your home, this company is worth checking out.
Pros: Low minimum credit score requirement; easy online application process
Cons: High fees and they don’t offer the lowest rates
| Lender | Spring EQ |
|---|---|
| Max LTV Ratio | 100% |
| Max Debt-to-Income Ratio | 43% |
| Min. Credit Score | 640 |
| Interest Rates | Interest rates start at 4.99 percent for the first 6 months |
| Loan Amount | Up to $500,000 |
| Term Lengths | Up to 30 years |
| Fees | Plan for a $799 administration fee along with a credit report and flood certification fee, document prep fee, title report fee, notary or title fee, recording fee and appraisal fee |
| Additional Qualifications | Plan to share your name, Social Security number, employment information and proof of income during the application process |
Recap of best home equity loans of 2020
| Lender |
Best lender for
|
Max LTV
|
Current home equity loan rates
|
|---|---|---|---|
| PNC Bank |
Best for low rates
|
89.9%
|
4.29% - 7.14%
|
| Discover |
Best for high loan limits
|
90% - 95%
|
3.99% - 11.99%
|
| BMO Harris Bank |
Best for low fees
|
Not disclosed
|
5.74% - 8.69%
|
| KeyBank |
Best for homeowners with minimal equity
|
100%
|
As low as 3.79%
|
| Spring EQ |
Best for bad credit
|
100%
|
As low as 4.99%
|
Reasons to use home equity loans
A home equity loan makes sense for a large, upfront expense because it’s paid in a lump sum. If you have smaller expenses that will be spread out over several years, such as multiple home projects or college tuition payments, a home equity line of credit, or HELOC, may save you money on interest. Top uses of home equity loans include:
- Making substantial home improvements.
- Consolidating higher-interest debt, such as credit cards.
- Buying a vacation home or investment property.
- Paying for college tuition or expenses for yourself or a child.
- Starting a business.
Pros and cons of home equity loans
Home equity loans are best suited for people who know how much they need as they’re distributed in one lump sum. Additionally, they’re a good option for folks who want to use the funds for home improvements. The reason for this is that the interest you’ll pay is tax deductible if the money is used for renovation.
Conversely, if you use home equity loan funds for any reason aside from substantial home improvements, such as paying off student debt or consolidating credit card bills, the mortgage interest is no longer deductible under the new tax law.
Another benefit of home equity loans are the competitive interest rates, which are usually much lower than personal loans and cash-out refinances. Be sure to compare lenders’ rates for the best deal available.
Pros:
- Lower interest rates than unsecured debt such as credit cards or personal loans.
- Fixed monthly payments
- Mortgage interest may be tax deductible
Cons:
- Closing costs can be expensive
- Risk of losing your home if you are unable to make the payments, or ending up underwater on your mortgage if home values drop
- The ease of tapping home equity makes overspending a risk; spend a home equity
Alternatives to home equity loans
Before taking out a home equity loan, ask yourself whether there are other options for financing that might be appropriate for your situation. For example, if you don’t need the money all at once in a lump sum, a HELOC could save you on interest costs. A cash-out refinance is another option, especially if your original mortgage has a higher interest rate than what’s available in the current market.
How to apply for a home equity loan
Prepare for a home equity loan application by checking your credit, calculating your home equity and taking stock of how much other debt you already have. Many lenders let you start the application process online by entering your personal and financial information. During the approval process you’ll be asked to provide supporting documentation such as your government-issued identification and pay stubs. You may need to pay fees for a loan application, credit check and home appraisal.
Home equity loan FAQs
If you have more questions or are still unsure about home equity loans, here’s a list of questions and answers to help you better understand the product.
What is home equity?
Your home equity is calculated by subtracting how much you still owe on your mortgage from the appraised value of your home. Home equity is one way to measure your personal wealth.
What is a home equity loan?
A home equity loan is based on the equity of the borrower's home. Unlike a HELOC, you receive all of the money upfront and then make equal monthly payments of principal and interest for the life of the loan (similar to a mortgage).
How do you calculate your home equity?
Over time, you build up equity in your home as you make payments on your mortgage. You’ll need a substantial amount of equity in your home to qualify for a home equity loan.
Home equity is defined as the value of your home minus any amount you still owe on your mortgage. The amount you’re eligible to borrow for a home equity loan is based on your loan-to-value, or LTV, ratio. A home equity calculator can help you figure out how much you can borrow.
Where can I get a home equity loan?
A variety of banks and lenders offer home equity loans. It’s always a good idea to shop around with a few lenders to compare rates, fees and loan terms.
When is a good time to use a home equity loan?
If you’ve been considering a home equity loan, now is the time to lock in your rate. Rates have been slowly moving higher, but they’re still lower than historical benchmarks. If you get a fixed-rate loan, which most home equity loans are, you will end up saving money in the long run if rates continue to climb.
What are the minimum requirements?
In addition to having enough equity, lenders will also factor in your credit score, LTV ratio and income when determining whether to approve you for a home equity loan.
Minimum requirements generally include a credit score of 620 or higher, a maximum loan-to-value ratio of 80 percent and a documented source of income.
Home equity lenders reviewed by Bankrate
Related articles on Bankrate:
- Best HELOC Rates
- Home equity lender reviews
- What is home equity?
- Home equity loans vs. HELOCs
- How to get a home equity loan with bad credit
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