Home Equity Loans

Whether you’re looking for a take out a home equity loan, learn about recent laws or interest rates, we’ll make your options a lot clearer.
Definition
Calculations
History
Laws & Rules
How-To HELOANs
Best Time to Use
HELOCs vs. HELOANs
Disadvantages

What is a Home Equity Loan?

A home equity loan is a loan that uses the equity in the borrower’s home as collateral. It pays out cash in a lump sum and has a set repayment term. This type of loan can be either a first lien or second lien on the property, depending upon whether the first mortgage has been paid off. Home equity loans are usually fixed-rate loans and mature after a set period of time, such as 15 or 20 years.

Home equity loans should not be confused with home equity lines of credit, which are a different type of home loan. Home equity loans are also often referred to as second mortgages, even if they are the primary lien on the home.

What is home equity?

In a nutshell, home equity is the amount of your home that you own outright with no mortgage against it. In simpler terms, it’s the amount of your home value that you have already paid off. 

How do you build home equity?

You build home equity by making your mortgage payments. Every payment that you make increases your home equity by a small amount until you have paid off your mortgage. Then your home’s equity will equal the current market value of your home. 

You can also build home equity in other ways, like building an addition to your house, for example. If you build the addition yourself and pay for the materials out of pocket without having to take out a home equity loan, then this is called “sweat equity.” 

Your home equity can also increase from rising home values. If you get your home appraised at a certain value, and then get it reappraised a year later at a higher value, then the difference in value will be counted as home equity. 

How do you calculate home equity?

You can determine the amount of equity in your home by simply subtracting the current balance of your mortgage from the current market value of your home. For example, if your home is worth $350,000 and your outstanding mortgage balance is $225,000, then your home has equity of $125,000. Calculating home equity should not be confused with calculating your home’s loan-to-value (LTV). 

How big could my home equity loan be based on my current equity?

The more equity you have built up in your home, the more options you will have when it comes to taking out a home equity loan. Different lenders have differing requirements for loan approval. For example: 

Let’s say lender “A” will allow a maximum LTV of 90% on the home. A borrower with a home worth $400,000 applies for a home equity loan with the lender. The primary mortgage balance is $300,000. Assuming that the borrower’s credit score and credit history are acceptable, the lender will approve a loan for $60,000 by using the equation: ($400,000 X 90%) – $300,000.

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Compare home equity line of credit loans and home equity loans interest rates. Find out what works for you.

Home equity loans vs home equity lines of credit (HELOCs)

There are two types of secondary mortgages that you can take out using your home as collateral. One is a home equity loan and the other is a home equity line of credit (HELOC). There are several key differences between the two types of loans. 

A home equity line of credit is, as the name states, a credit line that you can draw on at any time using the equity in your house as collateral. Unlike home equity loans, HELOCs have two key periods of time associated with them. 

The first period is called the draw period. This is the period of time during which you can draw on the line of credit up to the credit limit. These usually last from 5-15 years. Then comes the repayment period, where the current outstanding balance on the line of credit must be repaid. These usually last from 10-30 years. Here are a few other key differences you should know: 

Lump-sum 

Another key difference between home equity loans and HELOCs is how the money is dispersed. With a home equity loan, you receive the entire loan balance up front in cash. If you don’t use the entire balance at once, then you can deposit the remainder in your checking account. 

HELOCs allow you to draw only the amount you want at any time and don’t charge interest on any amount of the credit line that is not withdrawn. Most lenders provide HELOC borrowers with either a book of checks, a debit card, or some other convenient way to access their home equity. 

Fixed-rate interest

Home equity loans also differ from HELOCs in how interest is charged. The vast majority of home equity loans charge a fixed interest rate that does not change during the life of the loan. 

Most HELOCs are variable-rate loans, at least during the draw period. In most cases, you will have to make at least a minimum monthly payment during the draw period, but the amount of the payment can vary based upon prevailing interest rates. Then the payment becomes a set amount once the repayment period begins. 

One repayment stage 

Home equity loans have one repayment period that begins immediately after the money is dispersed. If you take out a home equity loan for $40,000 at a fixed rate of interest, then you will probably have to make your first payment in the month following the dispersion. 

Home equity loans, on the other hand, have two repayment periods: the draw period and the repayment period. The draw periods of most HELOCs are 10 year terms and the repayment periods are 20 year terms. So for the first 10 years, you can draw on your line of credit as many times as you need to (and repay as many times as you want), and the variable interest rates will last until the repayment period. 

Then, when the repayment period begins, the current outstanding balance on the line of credit is frozen, and this balance will be used to calculate your monthly payments during the repayment period. 

Higher closing costs 

Home equity loans typically have higher closing costs than HELOCs. Many lenders in fact advertise HELOCs that have low or no closing costs. Many home equity loans charge origination or broker fees, whereas this is typically not the case with HELOCs. If you want to get a home equity loan, be sure to shop around to see who can get you the best deal. Some home equity loans are more expensive than others. 

Common uses for a home equity loan

You can use the proceeds from a home equity loan in any manner that you desire. Some of the most common uses of these loans include the following:

  • Home improvements – Used to pay for various types of home improvement – remodel projects, or home renovations – such as a new kitchen, new bathrooms, a backyard deck, swimming pool or finishing the basement. This way you can make your home equity loan work for you. Improving your home value is one of the best and most common uses for a home equity loan.
    Home additions – A new room, sunroom, extra garage port or deluxe storage shed.
  • Educational expenses – Such as college, private school, tech school or other types of education.
  • Medical bills – Used to cover copays, deductibles and uninsured healthcare costs.
  • Long-term care – Used to pay for in-home care, nursing home care, etc.if no insurance coverage is available.
  • Major expenses – An extended vacation getaway, a new vehicle or RV, or a life insurance policy.
  • Debt consolidation – Used to pay off credit card debt, student loans, vehicle loans or personal loans that charge higher rates of interest.
  • Starting a business – If you need some start-up capital for a business venture, a home equity loan may be the best way to get it. 

How do I qualify for a home equity loan? 

There are several factors that lenders use to determine whether or not you qualify to receive a home equity loan, listed as follows:

Home value

In most cases, your home has to have a minimum value before a lender will give you a loan. It might be $75,000 or higher, depending on the lender and the type of property you own. 

Home equity

The more equity you have in your home, the greater the chance that the lender will approve your loan application. In most cases, you will have to have at least 15 to 20 percent of equity in your home before a lender will even consider your application, because that equity is what is needed for collateral. 

Debt to income ratio

Another key metric that lenders look at is the borrower’s overall debt-to-income ratio (DTI). Lenders will divide the total amount of the borrower’s currently monthly debt payments and by the amount of income that they make. If the DTI ratio is too high, then they will not approve the loan. The maximum allowable DTI ratio varies from one lender to another, but it usually cannot be any higher than 50% (and that’s not very common). 

LTV

Another important piece of data is your home’s loan-to-value ratio (LTV). This ratio is calculated by dividing the current amount owed on the home by its current market value. If your home is worth $300,000 and your current mortgage balance is $225,000, then your LTV is 75% ($225,000/$300,000). Most lenders have a maximum LTV that they will allow. In most cases, lenders will approve a loan for the amount between the primary mortgage and the maximum allowable LTV.

Creditworthiness

Your credit score, credit report, and credit history are all additional key factors that determine your eligibility for a home equity loan. Borrowers with good credit may get approved for a larger loan while those with fair or poor credit may get a lesser amount or be denied. A bankruptcy may be a fatal strike when it comes to getting a home equity loan. But borrowers with pristine credit often get immediate approval with favorable terms. 

How does a home equity loan work?

Applying for and getting a home equity loan is a relatively straightforward process in most cases. There are three basic stages in the application process:

Pre-application

The first few steps in the process happen before you actually submit the application. They are broken down as follows:

1. Determine your LTV and DTI

Before you start submitting applications to lenders, be sure to sit down and calculate both your debt-to-income ratio and your loan-to-value ratio as they are before the loan. You will have to disclose this information on any application that you submit, so this should always be your first step. 

Your DTI is calculated by dividing your monthly debt payments by your total monthly income, and your LTV is calculated by dividing your total mortgage balance by your home’s current market value. If your DTI is above 50%, then you will probably not get approved. If your LTV is 85% or more, then you’ll also have difficulty getting approved. 

2.Determine whether a HELOAN is the best option 

Home equity loans can be a godsend in many cases, but not always. If you have student loan debt that you are behind on, a home equity loan may help for the moment, but you may not be able to deduct the interest on your loan. And your student loan interest is already deductible before you itemize. Or, if you have several credit card balances that you want to pay off, be sure that you can make your home equity loan payment reliably each month after the consolidation. 

3. Shop lenders

Your first step to getting the home loan that’s right for you is shopping multiple lenders. Some may be willing to offer better terms for your circumstance, and it’s also possible to get lenders into a bidding war for your business. Here’s what you should know about shopping lenders… 

What should you look for when exploring lenders? 

You need to find a lender that offers a competitive rate, a fast and convenient closing process, and reasonable fees. Lenders that charge large origination fees should be avoided in most cases, unless they can offer a commensurately lower interest rate in return. What are average interest rates? Know what the prime rate is before you start shopping so that you can tell who is offering competitive rates and who isn’t. Find out what the criteria are for different lenders to give you the best rates. Different lenders will have different requirements here. 

What are some tips for evaluating lenders? 

Do some research on any lender you choose. You can look them up on the Better Business Bureau website or other websites that post customer feedback about the lender in question. Look for lenders that are in good standing with the NMLS. 

How many different lenders should you shop for? 

It’s a good idea to get quotes and fee disclosures from at least five different lenders in most cases. Also be sure to get quotes from your local bank or credit union, because you may be able to get better terms there since you’re already one of their customers. 

Who are the most popular lenders? 

To some extent, this depends upon the exact terms of the loan you’re looking for. Rocket Mortgage and LendingTree are both well-known names in the industry, along with all of the national and regional banks and credit unions. 

But you shouldn’t discount offers from small local member FDIC banks either, as they may be willing to offer better terms because they have less publicity. In fact, they will often have the lowest rates and should be seriously considered in most cases. 

Additionally, you may get a level of personalized service from a small bank that you can’t get from a conglomerate. They may be willing to get you the best loan terms, loan amount, loan options, loan payment and mortgage rates of anyone you talk to. You may be able to negotiate lower home equity loan rates with a small institution than you ever could with a large lender, too. And their credit approval may be more lenient than that of a large bank or corporation. 

Apply for a home equity loan 

Now that you have decided on a specific lender, it’s time to get ready to actually apply for the loan. You will need to have the following items in order to proceed:

1. Gather documentarian

You will most likely need to have your last three or four bank statements, a couple of pay stubs and possibly your most recent income tax returns handy. Copies of investment and cash value life insurance statements are also often used in the decision-making process. If you receive alimony or child support, then you will probably have to produce a copy of the court decree mandating this. 

2. Apply for the loan

Once you have the proper documentation, it’s time to apply for your loan. Here’s what you should know for this process:

How do you apply? 

You can fill out actual paperwork in most cases if you prefer, but many lenders today provide online banking applications that allow you to upload your documentation from home. Online applications are usually processed more quickly than paper applications, so this may be the way to go if you’re in a hurry to get your money. 

Who do you talk to? 

The web portal that you use for your online application will likely offer either a live person or a chatbot to answer any questions that you may have. All lenders also offer telephone service, allowing you to call in and talk to a customer service representative if you don’t feel like chatting or sending an email. 

Where do you apply? 

If you’re applying with your local bank or credit union, then you can go to the nearest location and apply in person there, or you can apply directly online at the lender’s website. 

When can you expect to hear back? 

The wait time can vary depending upon a variety of circumstances, such as whether you are a W2 employee or are self-employed. Your credit score also plays a role in how soon you get approved. 

Will you have to wait for an appraisal? 

Appraisals are often necessary in order to determine your LTV. If you haven’t had an appraisal done within the past five years, then yes, you will probably have to wait for an appraisal. But you may qualify for a larger loan this way. 

3. Make sure the HELOAN meets your needs 

Just because you’re approved for a loan doesn’t mean you should sign on the dotted line. Here’s what you should know before you commit to a lender: 

What should you look for? 

Be sure to find out what kinds of fees your lender charges. Broker and origination fees can substantially add to the cost of the loan, and many lenders will try to include these in the fine print upfront so that you won’t notice them. Also look for additional items such as late fees, prepayment penalties, or what will happen if you default on the loan. 

How will you know if a HELOAN meets your needs? 

If you know from financial analysis that you will be able to make your home equity loan payment reliably every month, then it is probably a good idea to take out the loan. This is especially true if your current debt payments are more than the home equity loan payment. If you can make those payments reliably, then the new payment should be no problem provided that you use the loan proceeds to pay those other debts off. 

Borrow

Once you have picked a lender and a specific loan amount, the actual borrowing process begins. This phase of the process usually happens fairly quickly. 

1. Wait for underwriting to finish and sign your paperwork

Underwriting will usually only take a week or two at most. Some lenders promise quick underwriting turnarounds while others are slower on the draw. 

If you have all of your documentation in order and have good credit, then underwriting is usually a very straightforward process. Your lender will contact you immediately if they have any additional questions. 

If they don’t, you can relax and wait for them to finish. Just be sure to confirm the rate and terms of the loan before signing on the dotted line so that you aren’t caught by surprise with any last-minute changes.  

Of course, you do have the option of waiving your disclosure period, which can speed up the loan process. Just know that it will also deprive you of several rights that you have regarding the loan, including:

  • Giving you the time you need to fully understand the terms of the loan offering
  • Providing you with the time necessary to find the best deal for you
  • Giving you adequate time to compare the rates and terms in the final deal with those of the preliminary offer
  • Giving you the time necessary to ask your lender important questions before your loan closes

2. Access your funds 

In most cases, you will get access to your funds within 24 hours of the closing date. You may either get a check or a deposit sent directly to your bank account. Once you have received your funds, you can access them the same way you access any other money paid into your bank account. You can use your debit card or write checks or draw out cash, depending upon what you need the money for. 

A few tips for using your funds

  • Don’t spend them on small things – Home equity loan proceeds should not be used to pay for monthly expenses in most cases. A possible exception includes if you become disabled and need to cover expenses for a set period of time until your disability insurance coverage kicks in.
  • Pay on time – Whatever you do, don’t fall behind in your home equity loan payments. This could seriously damage your credit score and make it harder to obtain other types of credit such as credit cards or a vehicle loan.
  • Use funds for something that can increase your home’s value – Renovations and additions are good uses for home equity loans. Plus, the interest that you are charged may be deductible if you are able to itemize your deductions.
  • Don’t invest your funds unless you can get a guaranteed rate of interest that is higher than the rate of interest being charged by the loan. Using a home equity loan to invest in the stock market is generally not a good idea unless you are a very experienced, knowledgeable, and successful investor. 

Repay your home equity loan

The final phase of your home equity loan is the repayment of the loan proceeds. The amount of time that you have to do this is set in the loan documents. Here are the steps and commonly asked questions about this phase… 

1. Send a monthly check or set up auto-debit

You can either send in a check each month or have the amount debited from your checking account or savings account. Most people choose the latter option because of its convenience. It also ensures that you won’t accidentally forget to send in your payment in a given month. 

2. Ask for an extension if you need it 

Contact your lender immediately if you become unable to make your loan payments. You can usually get an immediate extension if you ask for one. 

An extension is an additional amount of time that you are given to make your loan payments. If the lender grants you an extension, then as long as you can make the payment by the extension deadline, there will be no late fees or blemishes on your credit report. 

In some cases, the lender may actually be willing to restructure the remainder of the loan balance so that you can pay it off over a longer period of time. Look for this feature in the fine print of the loan documents when you sign them. 

How is this different from HELOC repayment? 

You begin making payments immediately with a home equity loan. You may not have to make any payments at all during the draw period for a HELOC. If you do, then the payment amount may vary depending upon changes in interest rates. 

Will repayment affect my credit score? 

Absolutely. You will further build up your credit if you make all of your payments on time, but you can seriously damage your credit score if you make multiple late payments or miss a payment altogether. 

Is there a penalty for paying off your loan too early? 

Some home equity loans charge a prepayment penalty, so be sure to look for this in the fine print before you sign your loan documents. It may be worth your while to pay the penalty if you can pay off your loan early. You’ll just need to run the numbers to see whether this is the way to go. 

Pros and cons of a home equity loan

There are both advantages and disadvantages to taking out a home equity loan, and you need to know what they are before you sign on the dotted line. The pros and cons of this type of loan are listed as follows:

Pros of a home equity loan 

  • Lower interest rates than other popular loan types – Lenders can charge less for this type of installment loan because they have your home as collateral. If you become unable to make the payments for any reason, then they can legally force you to sell your home.  
  • Great for debt consolidation – Making one payment on a loan charging you 6% interest is a whole lot easier and cheaper than making payments on five credit cards charging you 29% interest. Home equity loans have helped many consumers get their debt balances back under control. 
  • High borrowing limits – Most home equity lenders allow for LTVs up to at least 80% of your home value, with some going as high as 90% or even 95%. This can give you plenty of cash to use in any way that you need. 
  • Fixed monthly payments – You can plan way ahead when it comes to making your home loan payments. You’ll know exactly how many payments you’ll make, when they are due and when you’ll be done with them. 
  • Fixed interest (this is a pro if interest rates are going up) – You won’t have to worry about rising interest rates with a home equity loan. Unlike HELOCs, home equity loans almost always charge a fixed rate of interest that is based on the prime rate or Fed Funds rate. For this reason, home equity loans tend to become more popular when interest rates are rising, because borrowers can lock in a current rate now and enjoy a smaller monthly payment from then on. 
  • Tax-deductible interest – If you use a home equity loan to improve or renovate your home, then the interest you pay on the loan is tax-deductible if you are able to itemize deductions. This is true for any home equity loan balance of up to $750,000. Homeowners with loans that exceed this amount cannot deduct the interest on the excess balance. 

Cons of a home equity loan 

  • Higher upfront fees – Most home equity loans charge application, appraisal, and often origination fees. In fact, many of them charge the same fees that you would pay for a primary mortgage. This is not true with HELOCs, many of which charge no fees or closing costs at all. 
  • Fixed interest (a con if rates are going down) – While a fixed interest rate is great when rates are rising, they are also a bust when rates are going down. You may get locked into a loan charging a higher rate of interest than the current prime rate or Fed Funds rate in some instances. You are also almost certain to pay a higher rate (at least at first) with a home equity loan as compared to a HELOC.  
  • Risk of losing your home – Home equity loans can help you a lot in the short run, but they also use your home as collateral. If you completely default on the loan, then the lender may not hesitate to foreclose on your home and evict you. For this reason, you need to be absolutely certain that you can make your monthly payment reliably before getting this type of loan. 

Is a home equity loan right for you?

Home equity loans can be real lifesavers in many cases, but they are not always the best solution. Here is a list of questions to consider when contemplating whether to take out this type of loan.

You may want to apply for a home equity loan if… 

  • You need a large lump sum fast – This may be your only alternative if you have to get your hands on a substantial sum of money immediately. Most credit cards may be able to advance you a small amount of money, but this comes at a very high cost in most cases.
  • You have good creditworthiness – If your credit is in good shape, then a home equity loan may be the way to go. It will almost certainly be much cheaper than any other type of loan you can get.
  • You have a low debt to income ratio – Lenders will usually approve a home equity loan that has a low DTI ratio, as long as your credit score is good enough.
  • You have high LTV – If your primary mortgage is equal to at least 80% of your home’s value, then a home equity loan can push your LTV up to 90% or even 95% in some cases. But you can still qualify for the loan this way.
  • You have a steady source of income – If you work a salaried job or have substantial income from a self-employment venture, then qualifying for a home equity loan may be easier than you think.
  • Your expenses are fixed (as in, they are not ongoing) – If you are using the loan proceeds to pay a single, one-time expense such as for debt consolidation or a vehicle purchase.

You may want to avoid a home equity loan if…

  • You want to use the money to purchase everyday items – This is a VERY bad reason to take out a home equity loan. This type of loan should be reserved for big-ticket items such as a home renovation or debt consolidation. If you take out a home equity loan just to meet current expenses, then you’ll probably end up in worse shape than ever. And the lender may foreclose on your house if you default on the payments.
  • You have bad credit – If your credit is bad, then a home equity loan will charge an interest rate that may be too high for you to handle. With bad credit, you may not even be approved at all.
  • You have trouble controlling spending – Never take out a home equity loan to pay for your overspending. You will have done nothing to rectify the real problem and may lose your house if you cannot control the spending of your HELOAN funds.
  • You have low home equity – If you don’t have much equity in your home, then most lenders aren’t likely to approve you for a loan. You should ideally have at least 20% of your home paid off before applying for this type of loan.
  • Your income is unstable – If you don’t know whether you can make your loan payments on time every month, then a home equity loan is a bad idea. You can further damage your credit by taking out this type of loan and defaulting on it. And you could even lose your home.
  • Your expenses are ongoing – If you don’t know exactly how much money you will need for your project, then a home equity loan may not provide you with all of the funds that you’ll need. It’s a single lump-sum dispersed once. A HELOC, on the other hand, will allow you to take out more or less money depending on what you need on an ongoing basis.

Alternatives to home equity loans

Of course, a home equity loan isn’t always the answer. These alternatives may be better for your financial situation: 

Home equity line of credit (HELOC)

If you only need part of your loan up front, then a HELOC may be a better bet in some cases. You only have to pay interest on the actual outstanding balance of a HELOC, whereas you must start paying interest on the entire balance of a home equity loan from the outset. And HELOCs usually charge less interest up front than home equity loans do. HELOCs are also better for ongoing expenses, like home remodeling projects, since they allow you to take out more or less as costs fluctuate. 

Cash-out refinance

If you don’t want to burden yourself with a secondary home loan, then a cash-out refinance may be the best way to go. You can still get the cash you need with this type of refinance, but you will still only have one loan to pay off (albeit at a possibly higher rate of interest). Refinancing can ultimately accomplish the same purpose as a home equity loan in some cases. 

Reverse mortgage 

This type of mortgage has become popular with senior citizens because it doesn’t have to be paid off until they sell the house, and it can provide stable guaranteed income in the meantime. Just be sure to carefully review the terms and limits of this type of mortgage before you sign up for one so that either you or your heirs don’t encounter a nasty surprise later. Your outstanding mortgage balance will be subtracted from your sales proceeds after you’re gone. Your heirs may lose your home after you’re gone in some cases.

Personal loan 

This is probably the last alternative that you will want to explore if you can’t qualify for a home equity loan or HELOC. Personal loans typically charge much higher rates of interest than home equity loans, but they may be your only alternative if your credit is bad or if you can’t qualify for a home equity loan for any other reason. A personal loan that charges 16% interest is still better than having four credit cards that are charging you twice that amount. 

Home equity loan FAQs 

Still have questions about home equity loans? Here are some of the most commonly asked: 

Did the COVID-19 pandemic impact home equity loan laws?

Yes, it did in some ways. The Consumer Financial Protection Bureau (CFPB) created a rule that allows consumers to waive the disclosure waiting period if they need to. This new rule allows borrowers to forego the waiting period described above in order to close their loans more quickly. But the consumer must furnish an original written statement saying why they need their money immediately (as a result of the pandemic) and clearly waiving their rights to the waiting period. This statement must be signed and dated by all borrowers on the loan. 

Do you need to have a mortgage to take out a home equity loan? 

No, you can have your home entirely paid off and then take out a home equity loan if you need to. If this is the case, then the HELOAN will become the primary loan on the property. But there is nothing prohibiting this. You also don’t have to get your HELOAN from the same lender that you got your primary mortgage from. Different lenders offer varying terms on different types of loans, so your primary lender may not be the best choice for a home equity loan. 

Does the type of property I own affect my home equity loan?

The type of property that you own may play a role in how much money you can borrow on your property in some cases. If you live in a condo or duplex, you may not be able to get as much as you could if you own a single-family residence. But it should not affect the interest rate that you qualify for or other terms of the loan. The amount of money that you qualify to borrow still depends on your home’s LTV, your DTI ratio, and your creditworthiness. 

What happens if I can’t pay back my loan?

As mentioned previously, your lender will have the power to foreclose on your home if you become unable to make your home equity loan payments. This is why you must be absolutely certain that you can make your home equity loan payments before you close on the loan. This is true even if you can still make the payments on your primary mortgage. Any lender that has a lien on your house can foreclose on it, regardless of the status of any other loans you have on the property. 

Are HELOAN fees negotiable? 

In many cases, yes. This is probably more true with small local banks or credit unions than large financial conglomerates, but many lenders are willing to waive some or all of the closing costs or upfront fees in order to win your business. Don’t be afraid to get two or more lenders into a bidding war to earn your business. You may come out substantially ahead this way. 

Also remember that the annual percentage rate takes all annual fees, application fees, appraisal fees, and origination costs into account. One lender may tout that they have no upfront fees, but will charge a higher rate than a lender that does charge these fees. 

Be sure to take all pertinent factors into account before you close on the loan. A lower interest rate may not automatically qualify one lender over another. Lower interest rates are just part of the overall equation. Low rates are good, but there are also other factors to consider such as rate discounts. Some lenders will offer a lower-rate loan if you set up your loan for automatic payments. 

What safeguards are built into a home equity loan? 

When you apply for a home equity loan, the lender is legally required to give you a loan estimate, which is a preliminary disclosure of all of the costs and fees associated with the loan. This estimate must be provided to you within three business days of you submitting your loan paperwork and at least seven business days before closing on your loan. 

If you decide to move ahead with closing on the loan, then the mortgage lender must provide you with a closing disclosure, which clearly lays out all of the costs, fees and terms of the loan at least three business days prior to the closing. 

There is also a three-day cancellation rule built into all home equity loans. This means that you can walk away from the loan within three business days of signing the documents with no questions asked (except possibly from your mortgage broker if you used one).  

Can you get home equity loans with bad credit? 

You may be able to get at least a small home equity loan if you have a few blemishes on your credit report, but you will pay a higher rate of interest than those with pristine credit. However, even a home equity loan at a higher rate may be much better than a personal loan or other form of credit. Just be sure to run the numbers comparing your various debt options before signing up for a home equity loan. If this is the cheapest option, then you should probably still do it. 

The final word on home equity loans 

Home equity loans can be a great way to get your hands on a large sum of cash quickly. Just remember that the equity for the loan is your home, and be sure to read the fine print before signing on the dotted line. 

Some home equity loans and home equity lenders are much better than others. If you shop around, you should be able to find a lender and loan that are most suited to your needs and situation. There are a plethora of home equity lenders out there who would love to get your business, so don’t hesitate to compare all of the details of each loan offer with each other. One lender may be willing to waive the closing costs including the application fee and appraisal fee if they charge a slightly higher rate of interest, while another may charge the closing costs but offer a lower rate of interest. Consult your financial advisor for more information on home equity loans, how they work, and how they can benefit you.