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Compare Home Equity Products in February 2024
Find the Best Home Equity Option For You
Figure is the fastest way to turn home equity into cash with a 100% digital app & online appraisal. Use your funds to consolidate debt or finance your next home project.
- Largest non-bank HELOC lender in the US
- Approval in 5 minutes. Funding in as few as 5 days
- Flexible terms, redraw up to 100%, borrow $20K-$400K
Rocket Mortgage has been ranked #1 by JD Power for customer service for 11 years, which is based entirely on client feedback collected by the independent research firm
- Loans customized to your needs
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- Millions of satisfied borrowers
Benefits of Home Equity Products
Both a home equity loan and a home equity line of credit (HELOC) allow you to tap into the equity built up in your home, but they work in slightly different ways. Here are the benefits of each:
Benefits of a Home Equity Loan
Lump sum payment
With a home equity loan, you receive a lump sum of money upfront, which you can use for a specific purpose such as home renovations, debt consolidation, or education expenses. This provides predictability and allows you to plan your budget accordingly.
Fixed interest rate
Home equity loans often come with fixed interest rates, which means your monthly payments will remain the same over the life of the loan. This can be beneficial if you prefer a stable payment schedule and want to avoid the uncertainty of interest rate fluctuations.
Predictable repayment term
Home equity loans typically have a fixed repayment term, usually ranging from five to 30 years. Having a set timeline for repayment allows you to plan your finances and budget effectively.
Potential tax benefits
In some cases, the interest paid on a home equity loan may be tax-deductible, subject to certain limitations. Consult with a tax professional to understand the specific tax implications based on your individual circumstances.
Benefits of a Home Equity Line of Credit (HELOC)
A HELOC provides you with a revolving line of credit, similar to a credit card, allowing you to borrow and repay funds multiple times during the draw period, which is usually 5-10 years. This flexibility can be advantageous if you have ongoing or variable expenses, such as home improvements over time.
Variable interest rates
HELOCs often come with variable interest rates, which can be lower than fixed rates initially. If interest rates decrease, your borrowing costs may also decrease. However, it’s important to note that variable rates can fluctuate over time, potentially increasing your monthly payments.
Interest-only payments during draw period
In many cases, during the draw period of a HELOC, you may only be required to make interest payments on the amount you’ve borrowed. This can provide temporary relief on your monthly budget, as you’re not required to repay the principal during this period.
Access to funds when needed
With a HELOC, you have access to a predetermined credit limit and can withdraw funds whenever necessary, up to that limit. This can be useful for managing unexpected expenses or projects that require varying amounts of money over time.
It’s important to note that both home equity loans and HELOCs use your home as collateral, so failure to repay the borrowed funds could result in the loss of your home. Additionally, the specific terms, interest rates, and eligibility criteria for these loans vary among lenders, so it’s advisable to shop around, compare offers, and carefully consider your financial situation before making a decision.
Frequently Asked Questions (FAQ)
What is the difference between a HELOC and Home Equity Loan?
HELOCs and home equity loans are two types of ways for people to get equity out of their homes. Both of these lending products require that you have equity in your house, but they’re slightly different.
A home equity loan is a lump sum amount that you need to pay back in equal installments. The benefit of getting a home equity loan is that you’ll have a set repayment amount. Rates tend to be lower than a personal loan or credit card if you have a good credit score, but you’ll also have to use your house as collateral.
HELOC stands for “Home Equity Line of Credit.” It acts like a credit card, and you only use it when you need it. That isn’t a lump sum payment, and the interest rate can be variable. With that said, you can find fixed-rate HELOCs from some lenders too.
The benefits of HELOCs are that they usually offer a low-interest rate and are easy to get so long as you have adequate equity in your home and good credit.
The main disadvantage of a HELOC is that the interest rates can be unpredictable and variable, depending on how much you borrow.
What is a home equity loan?
A home equity loan is also known as a second mortgage, equity loan, and term loan. It’s when a mortgage lender lets you borrow money that’s against the current equity in your home. If your mortgage isn’t paid off yet, you’ll pay your home equity loan every month along with your mortgage. It’s a way to have money for different financial goals such as medical bills or college tuition. It can also prevent you from continuing to build up credit card debt. Credit card debt is worrisome since high-interest rates can make you owe more money over time.
If you don’t pay your monthly payments, then the bank can take your home from you with a home equity loan. This loan also decreases your home’s equity. If you haven’t paid, and you’re looking to sell your home, you’ll have to pay both your mortgage and home equity loan with the profit from the sale. A home equity loan isn’t the same thing as a home equity line of credit (HELOC). If you have a home equity line of credit, you’ll receive a credit that’s secured by your home, and you can use it when you need it. It’s similar to a credit card. You won’t receive a large sum of money with a line of credit.
How does a home equity loan work?
How much you can borrow with a home equity loan depends on how much equity is in your home. It’s the difference between how much you owe on your mortgage and the value of your home. A lender will also take a look at your income and credit score to calculate how much you’ll receive. It’ll also tell them how much of an interest rate to charge you as well. When you accept this type of loan, you’ll receive the money all at once. They’ll also require closing costs just like your first mortgage. Ensure you shop around to find the best lender since rates will vary.
How to get a home equity loan?
Before even applying for a loan or lines of credit, first, make sure you’re in a financial position to pay back the loan on time. Determine all of your necessary expenses such as your mortgage, food, car payments, etc. Make sure you factor in the closing costs as well. Next, decide how much equity you have, and how much you’ll need to borrow. Keep in mind that if your loan is bigger than the value of your home, then the fees will be higher.
After this, you can start shopping for different lenders. Try to find the best deal you can before choosing the first one you find. Check out your local credit unions and banks for different options. You’ll want to take a look at the different fees, monthly payments, interest rates, the length of the loan, and any penalties for missing a payment. Also, ask your mortgage lender for a rate since they might give you a competitive rate.
How to apply for a home equity loan?
When you’ve decided on a lender, ensure that you meet the eligibility requirements since they can have application fees. Applying for a home equity loan is very similar to applying for your original mortgage. You’ll provide proof of income, your property tax bill, and apply with your current mortgage statement. After this, you’ll need to have a home appraisal done. When you’re approved, you’ll receive the amount you’re approved as a lump sum. You’ll pay the loan amount in regular payments for the term of the loan.
Most of the time, the loans will have a fixed interest rate. A fixed interest rate means your interest stays the same even if the market forecast changes. If you don’t pay on your loan, you could have the lender foreclose on your home. Normally, how much you can borrow is up to 85% of the equity in your home. You can either apply in person or online. Before signing, ensure you read all the terms of the loan. Any questions you have as you’re reading over it, make sure you ask your lender. Each lender will vary depending on whether they accept in person or online.
What bank has the best home equity loans?
One option for home equity loans is through Discover. They’re a national bank that offers credit cards with rewards. They also offer banking such as savings, student loans, personal loans, and checking accounts. Discover is available in many states and has a lower interest rate. You can choose a loan that’s 10, 15, 20, or 30 years. You don’t have to worry about application fees, origination fees, cash at closing, or home valuation fees. This is a great option for those who have great credit. If your credit needs to be improved, there are plenty of other lenders out there.
Are home equity loans tax deductible?
Tax deductions are limited but available for home equity loans. They’re normally available if you have the loan to take care of capital improvements. Speak with your tax professional to see if you qualify.
Can I use a home equity loan to buy another house?
Yes, you can use your equity from your one property to buy another. Home equity loans tend to have low-interest rates as well since you’re using your home as collateral.
Can you get a home equity loan with bad credit?
Yes, you can get a home equity loan even with bad credit. Since you’re using your home’s equity as collateral, lenders feel more comfortable offering you a loan. To improve your chances of getting approved with a lower interest rate, you’ll want to know your debt-to-income ratio. It’s what you make divided by what you owe. If your debt-to-income ratio is in the lower 40s or less, you’ll be highly regarded by lenders. It’s important to shop around since some lenders will still approve you even if you’re above the 40s. If your debt-to-income ratio is high, it’s helpful if your credit score is higher.
Can you refinance a home equity loan?
Home improvements are a good reason to borrow from your home’s equity. Most of the time you can refinance this type of loan. If you notice that home equity loan rates today are lower than your original rate, it’s a good idea to see if refinancing is a good financial option for you. Some reasons to refinance are:
- Switching from an adjustable-rate to a fixed-rate loan
- Avoiding balloon payments
- Receive more cash from the equity
- Receive a lower interest rate
Keep in mind that you’ll still need to pay this new home loan or you could risk losing your home. If your home goes down in value, you could wind up owing more in your loan balance than the value. It’s not always beneficial to refinance, so make sure you take a look at all factors. Some lenders will require you to pay closing costs or other fees to refinance. You’ll also have extra interest as well since you’re starting a new loan now.
Is a home equity loan a mortgage?
A home equity loan is also known as your second mortgage. The key difference between a traditional mortgage and home equity loan is that a home equity loan you receive after you have equity in your property. Whereas your traditional mortgage you take out to afford your home. A home equity loan is the same as a traditional mortgage where you pay a loan over time with a fixed term. A home equity loan isn’t considered a second mortgage if you own your home and decide to take out a home equity loan on your home’s value. This loan option can have lower closing costs but higher interest rates.
Is a home refinance or home equity loan better?
Lenders will usually pay most of your closing costs on home equity loans but not a cash-out refinance. A home equity loan would go further if the rates are better now than your existing mortgage. If you can lower your interest rate on your first mortgage and take out cash, then a cash-out refinance is a better option. Interest rates tend to be lower for cash-out refinances than home equity loans. Both options have fixed interest rates, but rates can be adjustable with a cash-out refinance. Both will give you a lump sum. Cash-out refinances tend to be easier to be approved for since it’s taking over your primary mortgage. Cash-out refinance can last for several years, similar to your primary mortgage. Home equity loans tend to be shorter when you need to pay them back.
Should I get a home equity loan?
When you’re deciding if a home equity loan is right for you, you’ll need to think about different questions such as if you have credit card debt with high-interest rates. Many choose a home equity loan to pay off any credit card debt.
Check out other loan and mortgage options before deciding if this loan is right for you. Compare interest rates, terms of the loan, and initial loan costs. Consider if you have a large purchase to make whether it’s home improvement or a wedding.
When your expenses come at one time, that’s when it’s better to choose this equity loan instead of a line of credit. Keep in mind how long you plan to stay in your current home. If you sell your home, your equity loan and primary mortgage will be paid off. If you’re not planning on moving soon, then a longer loan term is good to keep your payments lower. If you choose a shorter loan, that’ll regain the equity quicker so you’ll have more funds when your home is sold. Avoid a home equity loan for non-essentials such as a vacation. Make sure you can pay the loan off and are financially secure.
Ask your lender about possible fees such as:
- An early pay-off fee
- Closing fees
- Originator fees
- Appraisal fees
- Title fees
Keep in mind that home equity loans tend to be lower rates than credit cards so they can be more financially sound than a credit card. Before taking it out, ensure it makes more sense for you than a home equity line of credit. A home equity line of credit you’ll only take what you need, and pay that amount back instead of a lump sum.
What can a home equity loan be used for?
A home equity loan can be used for paying off high-interest credit card debts, your child’s college tuition, or home repairs. It can be used for any large remodeling or upgrades to your home, as well.
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