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How Home Equity Loans Function

Where Can You get a Home Equity loan

What to Look for

Mortgage FAQs for Home Equity

The Bottom Line

Equity in Homeownership Equity

Where to Get a home Equity Loan

They’re widely available, buy it pays to shop around

By Rae Hartley Beck

Updated August 31 2022

Review by Doretha Clemon

Facts checked by Melody Kazel

Home equity loans are more readily available in places than you’d think. This article explains how to locate home equity loans and how they function and how to make sure you’re getting a top-quality one.

The most important takeaways

You can get an equity in your home loan from banks, credit unions, or specialized lender.

A quality home equity loan will have no or low fees, a low percentage of fixed rate interest and no prepayment penalties and clear terms.

The best way to compare the cost of various loans is to check their annual percentage rates (APR).

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

How Home Equity Loans Function

The home equity loan allows you to borrow against the equity you’ve accumulated inside your property. You receive a single lump-sum amount that you repay over time in equal monthly installments generally at a fixed rate rate.1

How to Get a Home Equity Loan

The home equity loans are available from many of the same lenders that offer regular mortgages. If you’re a member of a credit union, it’ll most likely offer the home equity loan option with highly competitive rates and charges. In addition to credit unions, many banks provide low- or no-cost house equity loans. There are also lenders that focus on home equity loans.

If you’ve got a few potential candidates, make sure to get estimations from all lenders, so that you can conduct some comparison-shopping. That includes the loans’ costs, terms, fees, and the annual percentage rate (APRs). The APR should be used when comparing costs to ensure the most accurate comparison.

Mortgage lending discrimination is illegal. If you believe that you’ve been subject to discrimination based on religion, race or sex, marital status, use of public assistance or disability, national origin, or the age of your child, there are steps that you can follow. One such step 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 should you look for in a Equity Loan for your Home? Equity Loan

Make sure the lender you’re considering is legitimate. The lender ought to be able to provide you with their Nationwide Multistate Licensing System (NMLS) number.3 You can check it out at the NMLS Consumer Access webpage to determine if it is registered to conduct commercial transactions within your particular state and determine if any complaints have been made against it.4

Once you’ve determined that you’re dealing with legitimate lenders, here are the top aspects to look to find in the house equity loans.

There is no penalty for prepayment: Particularly with the rising interest rates, you’ll need to be able to pay on your equity home loan ahead of schedule without penalty or fees to do so. Paying off your home equity loan quicker than making the minimum payments can help you save thousands in interest. Additionally, it will free your equity, making it less likely that you will fall underwater if your home’s value falls.

Low or no fees: There are many home equity loan options with zero fees or fees that are extremely low. This could make it possible to save a substantial amount of cash upfront before you get the loan or pay off interest over the life of the loan when you incorporate fees into the loan.

A low interest rate An interest that is lower can save you a significant amount in the life of the loan. In the above paragraph, the rate you need to concentrate on is the APR, which takes account both the basic interest rate and additional fees providing you with the most accurate image of the amount the loan is actually going to cost you.

Fixed interest rates A fixed interest rate: Although most home equity loans come with a fixed interest rate but not all have. You should make sure that you sign to one that has a fixed rate so you don’t get caught off guard by an increased payment amount down the road.

Transparency The home equity loans should be clear before and at loan signing , including the loan amount APR, interest rate, fees, any penalties for early payment, and the loan term (length). Every home equity loans should provide clear and concise information under the TRID (TILA-RESPA Integrated Disclosures) rule.5

What Are the Risks of a Home Equity loan?

A home equity loan uses you home’s value as collateral, which gives you a better interest rate than what you would get from unsecured debt like credit cards or a personal loan. This means that you could be forced to sell your house if you can’t keep up with the payments. Another major risk associated with a home equity loan is when you use too much equity and the value of your home decreases. If this happens it could result in you becoming underwater on your loans, meaning that you have more debt on your home than it is worth. This may prevent you from selling your home until the value rises or you’ve paid down your loans in a sufficient amount, which can take years.6

What Are the Alternatives to a Home Equity loan?

The best alternatives to a home equity 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 the home equity loan to pay for. If saving for the future isn’t possible or not feasible, a 0% APR credit card or personal loan are two options that don’t risk your home if you can’t afford to pay back the loan.

What are the requirements to get a Home Equity Loan?

To get a home equity loan you must have a good credit rating, low debt-to-income ratio, an income history showing you’ll have enough money to repay the loan as well as a ratio of loan-to-value of 90 percent or less.789

The Bottom Line

A home equity loan is a simple way to borrow money at an extremely low interest but, at the same time you’re putting at risk your home. If you are looking for an equity home loan choose the option that can make the most savings as well as allow you to repay your loan early if you’re in a position to.