Home Equity Loan Services Review
Why Get a Home Equity Loan?
The top performers in our review are LendingTree, the Gold Award winner; Citibank, the Silver Award winner; and Wells Fargo, the Bronze Award winner. Here’s more on choosing a loan to meet your needs, along with detail on how we arrived at our ranking of these 10 loan providers.
One of the major benefits of homeownership is knowing that you are not throwing money away on rent. Rather, your mortgage payments are building equity as you pay off the balance on your loan. If you ever sell your home, you know you're getting back part of what you put into it.
That equity can also benefit you even if you don't sell your home. If you ever need a loan for a bigger-than-expected expense, a home equity loan is an option. You can choose from two types of equity loans: either a lump sum loan against which you make monthly payments like a typical loan or a home equity line of credit (HELOC). Both loan types are based on your home's equity, but they work a bit differently, as discussed below. To learn more about home equity loans, look at our articles on these loans and HELOCs.
How to Decide Whether a Home Equity Loan is Right for You
With so many loan options, it is important to understand the pros, cons and risks of a home equity loan. Lower interest rates – and by lower we mean in comparison to the rate you'd get with other loans or credit cards – may be a bonus, but closing costs and fees can quickly add up and eat into the total amount of your loan. As with any loan option, the amount of your loan, the rates and fees are determined by many factors, so shopping around is advised.
Pros & Cons
While you can use a home equity loan to finance just about anything, this loan is not a typical debt loan: This is spending an investment. When you take out a home equity loan or HELOC, you are depleting an investment you have been building up for years. These funds should not be spent lightly or used for frivolous purposes.
However, there are times when additional funds may be necessary. A positive reason for borrowing against your home equity is to increase the value of your home. Improving the value of your home with needed repairs can be an option to reinvest your equity back into your home. Many people also borrow against their home's equity to pay for their children's education, having established themselves in their home and having no intention of leaving.
One pro of home equity loans and HELOCs is that they often come with lower interest rates than other loan types or credit cards. HELOCs typically have a lower initial interest rate than traditional fixed-rate equity loans; however, because HELOCs have variable rates, you may find the rates are higher toward the end of paying off your loan than when you first started.
A con of home equity loans compared to credit cards is that you have additional fees that you wouldn't pay with a credit card, such as closing costs. Many companies waive closing costs, and you are not responsible for paying those costs unless you pay off your loan early, in which case lenders expect you to cover them after the fact.
As is the case with any loan, there are risks involved. The main risk is defaulting on the loan and losing your home, as these are secured loans with your home as collateral. A second risk pertains to a HELOC. If you receive a substantial credit limit, say somewhere around $100,000, and you borrow the full limit, you will have very large if not unmanageable monthly payments when the draw period ends and the repayment term begins. Making an honest assessment of what you can afford is the best way to avoid these pitfalls and permanent negative consequences.
Mortgage Refinance Option
Commonly referred to a second mortgage, with mortgage refinancing you create a new, lower loan based on the equity you have in your home. You can lower your interest rate, or you can use a cash-out option to use the equity you've built. For example, suppose you have a property that is worth $200,000 with a remaining mortgage balance of $100,000. If you refinanced that to a $120,000 mortgage, you would essentially keep $20,000 of the equity you've built.
Compared to a home equity loan, refinancing typically has lower rates but higher closing costs. Over time, these differences may balance out. But as mentioned above, many factors go into determining your costs. To learn more about refinancing, have a look at our Mortgage and Refinancing site.
Reverse Mortgage Option
A reverse mortgage is another option that works for tapping your home's equity. There are stricter requirements for a reverse mortgage, however. To begin with, you must be at least 62 years old. Many lenders prefer that you own the property outright or have a very small amount left to pay on your mortgage. Similar to an equity loan, you can receive the loan amount in a single lump sum or in equal monthly installments paid to you from the creditor, which is why it is a reverse mortgage: You receive payments rather than make them each month.
While there are pros to a reverse mortgage loan, there are also cons. These include higher fees than you typically see with other loans, including higher interest rates, insurance premiums and origination fees. Plus, if the housing market drops, you may end up owing more than your home is worth. And as mentioned above, there are stricter requirements to qualify for this type of loan. To learn more about this option, read our review of reverse mortgage lenders.
Traditional Equity Loan vs. HELOC
When choosing between a traditional loan or a line of credit, you should understand what each loan type entails and the pros and cons of each choice. An equity loan provides a single lump sum all at once against which you make set monthly payments. Traditional equity loans come with fixed rates that do not change over the life of the loan, so you can expect the same cost for principal and interest each month, though changes in taxes may affect the total monthly payment.
A home equity loan is a good choice if you need a large amount of money at once rather than over an extended period of time. You also have a set rate and payment over the term of the loan that never fluctuates. One downside is that unlike a line of credit, you cannot borrow any further funds in the future.
If you wish to use your equity like a credit card, you can receive a line of credit against which you can borrow when you need the money and make monthly payments on the balance. With a HELOC, there is a draw period during which time you can withdraw up to your approved credit limit. After the draw period ends, the repayment term beings during which you pay back the remaining balance like a standard loan. HELOCs come with variable rates that change over time.
A HELOC might be a better choice if you need steady funds spread over several years rather than a large sum all at once. A bonus is that like a credit card, if you pay off the principal amount in a timely manner, you pay little to no interest. However as far as interest is concerned, a variable rate may be a downside to some. Further, many services require you to draw a minimum amount at closing.
What You Should Know
As with all loans, there are conditions, terms and fine print. Home equity loans and HELOCs are no different. It is important to understand how these loans work. You want to understand what your rates are, whether they are fixed or variable, the term of your loan, the basic process and if you are eligible, because whether or not you qualify for a loan is the first step.
Eligibility & Process
To be eligible for borrowing against your equity, you must meet a few minimum requirements. One of the major considerations is your loan-to-value ratio (LTV). This number is figured by dividing the amount you owe on your mortgage by the appraised value of the property. Most companies prefer this number not exceed 80 percent, though some banks, such as TD Bank, may accept a higher LTV ratio – up to 90 percent – depending on other factors.
Companies also look at the amount of equity you've acquired. When examining equity, companies consider how much equity you have and weigh that figure against the loan amount you're seeking. Most companies lend between 80 and 90 percent of your home's total equity, though you may find some lenders are willing to lend up to 100 percent. Other companies require a minimum dollar amount, such as Wells Fargo, which requires at least $10,000 in equity.
Companies also consider your credit score and debt-to-income ratio (DTI). Most require a good-to-excellent credit score, with the average requiring a minimum FICO score of 660 to 700. Many services accept lower FICO scores depending on other factors. LendingTree works with lenders who accept credit scores as low as 580, again depending on a number of factors. This makes it a great option for those with less-than-great credit. The average accepted DTI is typically around 40 percent. However, each individual provider has their own requirements and discretion for accepting applicants outside of their set parameters.
The majority of lenders have an online application process, during which many perform a soft credit pull to determine your eligibility for a loan. If you qualify and choose to accept a home equity loan or HELOC, you'll be asked to provide more information and required documentation, including proof of mortgage, income and employment, among other documents.
Rates & Fees
While rates and fees vary from company to company, there are some similarities they share across the board due to industry standards and competition. Interest rates are always subject to change, and your personal credit worthiness and situation directly affects the rates for which you are eligible, but common averages can be identified.
For HELOC loans, interest rates average around 4 percent, with higher interest rates for lower loan amounts and lower rates for higher loan amounts. Keep in mind that HELOC loans come with variable rates, but the law requires there be a cap that your rate cannot exceed. Be sure to ask your lender about the cap and the floor of your rate so you know what to expect. The average rate for a lump-sum equity loan is around 6 percent. Again, your credit worthiness is going to be one of the biggest influencers of your interest rate.
Other typical loan fees apply in most cases, though some lenders may waive certain fees at their discretion. Closing fees are standard with these types of loans, so you should expect to pay a closing fee, though the amount will vary according to the lender. The lender may wish to complete their own appraisal of your home at cost to you, so be aware of a potential appraisal fee.
While not as common, a loan provider may charge an application fee. Most companies do not charge this fee though, but it's important to ask. Some less obvious fees to ask about are maintenance fees and early payoff fees. If you plan to make larger payments than what is required of you to pay off your loan more quickly, make sure you choose a company that does not charge this fee.
Payments & Terms
Payments for both loan types are due monthly. If you have a fixed home equity loan, these payments will be the same each month over the term of your loan. If you have a HELOC loan, your payments will fluctuate. The amount of this variation is twofold, being based on what your loan's variable rate is and the balance of your line of credit.
The term of your loan is set at closing, but there are different options in lengths and different processes depending on the loan type. The most common term for a traditional home equity loans is 30 years, though 15 years is usually an option.
A HELOC also has a draw period, which typically is between five and 10 years. After the draw period ends, the repayment term begins, which, on average, is an additional 10 to 15 years, but varies depending on the conditions of your loan.
What We Evaluated, What We Found
When considering which lender would be the best for your home equity loan, we scrutinized eligibility requirements. Lenders with higher accepted LTV and DTI ratios, higher maximum loan amounts and lower minimums might mean you're more likely to qualify, but again qualification and final approval of a loan hinges on several factors. Companies such as Key Bank and Bank of America accept a higher LTV ratio while other lenders like Citibank accept a higher DTI. For overall flexibility with eligibility requirements, LendingTree is a great choice. As a broker, it connects you to its network of lenders so you have a number of options to choose from, including a number of top 25 lenders and subprime lenders.
Some companies offer larger loan amounts than others, but in general, you'll see a maximum loan amount of around $150,000 to $500,000 and a minimum of around $10,000 to $25,000. However, if you're looking for the largest amount you can borrow, provided you have enough equity, U.S. Bank is a good choice as it potentially offers loans as large as $750,000. On the other hand, if you do not need to borrow such a large amount and do not wish to take out more than you need, you may prefer Key Bank, which has the lowest required minimum loan amount of $5,000.
We also assessed each lender's customer service and support. We reached out to companies by phone and email and evaluated the response and support we received to questions we posed. We also evaluated the ease with which our application was completed. In our experience, Third Federal Savings & Loan provided us with the best overall customer experience. Both Third Federal and CitiBank provided accurate information and a willingness to answer our questions when we contacted them, and TD Bank and Wells Fargo have some of the best customer support options, including quick responses to emails and hundreds of local branches across the country if you need face-to-face support. If you're looking for the most simplistic process, Wells Fargo, TD Bank and Third Federal are great choices with quick underwriting turnaround time and immediately available funds once you close on your loan.
As with any loan, rates and fees are of utmost importance. Most companies offer similar ranges, and the rate for which you qualify is determined based on all aforementioned considerations, such as LTV, DTI and your FICO score. Key Bank and TD Bank offer the best rates for traditional fixed-rate loans, with rates in the low 4 percent range. The average for HELOCs is a variable cap of 18 percent, which most companies on our lineup offer, though some caps go as high as 24 percent.
Closing costs can add up, but most lenders on our lineup waive these costs. Some fees, though, like the early payoff fee, you will be responsible for. Of the lenders that charge closing costs, the fees are generally a few hundred dollars. If a company chooses to waive closing costs, it may expect you to cover those costs if you pay off your loan early. In those cases, early payoff fees range from the total of the closing costs up to closing costs plus a few hundred dollars. Some lenders, including U.S. Bank, Citizens Bank and Chase, do not charge early payoff fees.
Our Verdict & Recommendations
When choosing a lender for your home equity loan, first and foremost be sure you qualify. Major factors that determine your eligibility will be your LTV, DTI and credit score. Other factors, such as your credit history and income, will influence the loan amount and your final interest rate.
If you are concerned about qualifying, LendingTree is a good choice because it connects you with its pool of lenders, providing you with more options and opportunities to be accepted for a home equity loan or HELOC. Key Bank and TD Bank have less-strict requirements than other services, so they are also a good choice.
If you are looking for a larger-than-average loan, U.S. Bank may be your best bet. Depending on how you qualify, you may be eligible for a loan up to $750,000 or one as low as $15,000. Key Bank offers the lowest minimum loan amount if you do not wish to borrow more than you need. It also has the most flexible draw periods for HELOC loans, ranging from one to 15 years.
For the best rates and fees, Third Federal is a good choice. Its fixed interest rates are lower than most other services, its variable rate cap competitive and it does not have closing, early-payoff or application fees.
Our lineup includes a roundup of the best home equity loan services on the market, each offering competitive rates and fees. As with all loans, your interest rate, loan amount, and other exact figures are ultimately going to depend on the company's prequalification requirements. It is best to shop around to find a loan that offers the best rates possible, that fits what you are looking for and offers a repayment schedule that you can personally manage.