Home equity loans and lines of credit allow many consumers to access a substantial amount of money in a short time, which can be a godsend if funds are needed to pay for medical or educational expenses. But there are a great many lenders out there who offer turnkey packages designed to streamline the home equity loan process. This means that you'll have to do your homework in order to find out which offer is best for you.
The simplest answer to this is that a home equity lender is any entity that offers either home equity loans or home equity lines of credit to consumers. Banks, credit unions, savings and loans, the Veterans Administration, and private mortgage lenders all offer these types of loans to customers who qualify for them.
It should be noted that not all lenders are created equal; for example, a military veteran will probably be able to get a better deal from the VA than any other lender in most cases. There is also a new breed of lender that offers a fully automated, online method of applying for a home equity loan or line of credit.
Figure – This Company’s product offerings go beyond home equity loans. They offer a unique line of credit product that closely resembles a home equity line of credit but also has some of the features of a home equity loan. Consumers with a credit score of at least 640 can apply for a loan of $15,000 to $150,000. The process is done entirely online, and there are no closing costs except for a lone origination fee. These loans have fixed annual percentage rates that start at 4.99% and terms that go out as far as 20 years. Borrowers are also allowed to take additional draws on their loan after they’ve paid the current balance down to a certain amount. Initial funding can happen as soon as 5 days after the application has been submitted.
Bank of America – BOA offers home equity lines of credit with introductory rates of just under 4%. Then the rate resets to a variable rate of about 5.9% (although BOA analysts believe that interest rates will rise further before flattening out.) There are no application fees, annual fees or closing costs. Bank of America offers a rate discount of 0.25% for those who set up an automatic payment plan and an additional discount of 0.375% for their Preferred Rewards® customers. They also provide online chat support and a comprehensive website replete with educational tools and customer-friendly features.
Chase Bank – All of Chase’s home equity lines of credit are assigned a 10-year draw period and a 20-year repayment period. Customers have the option of choosing between a fixed rate and a variable rate of interest on their loans. Chase HELOCs also come with minimal fees, such as a $50 origination fee and a $50 annual fee. Current Chase customers who have qualifying accounts can get a discount of up to 0.62% off of their variable APY, and HELOCs are available in balances ranging from $50,000 to $500,000.
Flagstar Bank – This bank offer home equity lines of credit with interest rates that are based on The Wall Street Journal Prime Rate. There are no fees for this line of credit as long as the borrower keeps it open for at least 3 years. There is a 10-year draw period and a 20-year repayment period. Interest rates currently start at 3.49% APY for the first 6 months and then jump to 5.74% APY thereafter.
SunTrust Bank – This bank offers home equity lines of credit that qualify for several discounts as long as the line is left open for a certain amount of time. There’s a rate discount for those who open a credit line of at least $25,000, and as many as 5 loans of at least $5,000 are convertible to a fixed-rate option at any time. There are several ways that customers can access their funds, including checks, online, through the mobile app or at a branch. There is also no annual fee for Signature Advantage or Premier Line customers. However, all other customers must pay an annual fee of $65 a year and borrowers can be charged as much as $2,000 for closing costs if the line of credit is closed within 36 months. There is also no interest-only option for borrowers who are in a tight place financially.
Figure – This company is a direct-lending company that exclusively offers home equity loans ranging anywhere from $10,000 to $150,000 as long as the loan-to-value ratio is 80% or less. There are no user fees plus live-chat customer service. The only downsides are the 3% origination fee and a required minimum credit score of 680. Figure is best known for its ability to provide borrowers with reliable fixed-rate loans that can be used for home improvements or other large purchases. Their underwriting process is very simple, and they offer loans in 5,7,10 and 15 year terms with no prepayment fees. The application is easy to complete, and Figure only does a soft credit pull that won’t affect your score. Their live chat support is prompt and helpful, and they will respond quickly to all inquiries made during business hours.
U.S. Bank – In addition to credit cards and other traditional bank products, this bank offers high-quality home equity loans with reasonable terms. You can get a 10-year home equity loan with an APR of 5.49% or a 15-year loan with an APR of 5.74%. 30-year loans are also available. This bank offers loans of up to $750,000 which you can apply for online from the comfort of your own home. In addition to competitive interest rates and 30-year loans, U.S. Bank has a customer service department that has scored well in customer satisfaction and no application fees, annual fees or closing costs. There is an optional origination fee. They also offer a rate discount of 0.25% for those who set up an automatic monthly payment plan and offer a further discount of 0.375% for those in their Preferred Rewards® program. Their mobile platform is very comprehensive with an online chat feature.
PenFed Credit Union – This Company offers home equity loans with a wide range of terms that go out as far as 20 years with a maximum loan balance of $400,000. PenFed allows loan-to-value ratios of up to 90%, but the best deals are reserved for customers who’s LTVs are 80% or less. The credit union has an online portal that customers can use to apply for a loan and it may pay some or even all of your closing costs if you qualify for their closing cost credit. PenFed also offers competitive rates that can be as low as 5.34% for some loans.
CitiMortgage Financial – Borrowers can sign up with this service either in person, over the phone or online. If the third option is chosen, then users can get a free consultation with a loan officer and also get preapproved. Their maximum debt to income ratio is 43%, but they have a range of products to match a range of credit scores. There is a $100 application fee plus an origination fee that varies depending upon the borrower’s location and the type of loan in question. The amount of the loan can range from $10,000 to $8 million, and its HomeRun loan program allows borrowers to put as little as 3% down to start. Customers who have a Citibank demand deposit account also qualify for discounts on rates and closing costs.
Navy Federal Credit Union – This credit union caters to customers who serve in the U.S. military and their families. It offers a complete range of loan products, but prioritizes VA and FHA loans. It also employs an alternative form of underwriting that takes into account such items as rent, utility and mobile phone bills. The loan products that it offers are designed to minimize the amount of closing costs that its customers will have to come up with at the time of purchase. Navy Federal offers loans up to 100% of the borrower’s home value with loan amounts ranging from $10,000 to $500,000. There are no application or origination fees and terms range from 5 to 20 years. The only real limitation is that borrowers must qualify as a customer for the credit union in order to get a loan.
The Difference Between Home Equity Loans and Home Equity Lines of Credit
Home equity loans are essentially second mortgages, and they resemble first mortgages in that they have fixed interest rates and fixed loan terms. Borrowers start paying interest on the entire loan balance up front, and they receive the entire loan balance up front in a lump sum as well.
Home equity lines of credit are, as the name states, simply lines of credit that borrowers can draw from when they need to. There is a maximum amount of credit provided as specified in the loan documents. Borrowers are usually given either a book of checks or a debit card (or both) that they can use to draw from their equity. Home equity loans usually have a draw period, or period of time during which the borrower can draw on his or her home’s equity, and a repayment period, where the borrower is required to repay all of the amounts that were withdrawn.
Fixed Interest Rates
Most home equity loans charge a fixed rate of interest, which can be either an advantage (such as when interest rates are rising) or a disadvantage (such as when interest rates are falling). Some home equity lines of credit also charge a fixed rate, or at least allow the borrower to convert some or all of their outstanding loan balance to a fixed account.
Variable Interest Rates
Most home equity lines of credit charge a variable interest rate that rises and falls in tandem with a major financial index such as the Prime Rate Index. This can be an advantage (such as when interest rates are low) or a disadvantage (such as when interest rates go up). There are also a few home equity loans that charge a variable rate of interest over the life of the loan.
Under Trump’s new tax laws, interest paid on either type of loan is only tax deductible if the loan proceeds are used to build, improve or buy the property that the loan is taken out against. Interest on home loans taken out for debt consolidation, medical or educational expenses is no longer deductible. However, home equity loans and lines of credit can still be a better alternative than personal loans or credit cards in most cases because of their lower interest rate. And they can be a more convenient alternative than a cash-out refinance when it comes to tapping into your home’s value. Consult your tax advisor for more information on the new rules governing the deductibility of home equity loan interest.
Many home equity loans and lines of credit still require full standard underwriting, where the lender checks your credit score and credit history, the market value of your home and your cash flow and balance sheet before approving the loan. But many lenders will reduce or eliminate closing costs for those who qualify, which makes taking out these mortgage loans cheaper.
Data analytics and software firm Black Knight reports that the total number of home equity loans and HELOCs taken out last year equaled a paltry 1.13 percent of total home equity in America. That is a drop of 3% from the year before and is the lowest amount drawn from equity since 2014.
As of 2018, the latest reports indicate that Americans have about $15 trillion dollars saved up in home equity.
The Fintech Revolution
Another key area of growth in the home equity loan industry is in the fintech sector. A growing number of lenders are offering complete, seamless turnkey services to prospective borrowers. These lenders allow users to get loan offers, find the best rate, apply online, get underwritten electronically and pre-approved before ever talking to a human being. And most lenders already allow users to fill out loan applications online and make electronic loan payments either through a monthly debit from their financial institution or payment using a mobile app.
A report from the New York Federal Reserve revealed that fintech’s share of the mortgage market quadrupled from just 2% in 2010 to 8% in 2016. Fintech offers several advantages over traditional lenders because they can process applications in 10 days as opposed to 50 days for applications that are processed manually. Furthermore, the default rate in the fintech sector is 25% lower than for traditional lenders.