A complete guide to mortgage terms, rates, and phrases you may not understand.
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A home equity loan (HEL) is a mortgage refinance loan in which a homeowner uses the equity, or a portion of the equity of their property, as collateral. Your equity is your property’s value minus the amount of any existing mortgage on the property. This type of loan is often used to finance major one-off expenses, including home renovations or repairs, medical bills, repayment of credit card debt, or college tuition. A home equity loan is also commonly referred to as a “second mortgage,” whereas a “first mortgage” refers to the original mortgage you used to purchase your home.
With a first mortgage, the borrower makes monthly payments to the lender, gradually paying off the loan and increasing their equity in a property. With a refinance, the borrower takes out a new loan to pay off the first mortgage, but with newer, more suitable terms.
With a HEL, the lender makes a one-off payment to the borrower, and the borrower’s home equity shrinks. Just like a first mortgage, the borrower must repay the amount loaned, along with additional interest and fees.
A second type of home equity loan is the home equity line of credit (HELOC). Where a regular home equity loan is usually given as a lump-sum payment, a HELOC gives home owners the option of borrowing up to an approved credit limit on an as-needed basis. Under a regular home equity loan, interest is paid on the entire loan; under a HELOC, it is only paid on the money withdrawn. Home equity loans use fixed rates; HELOCs use adjustable rates.
Because the borrower’s home is being used as security, lenders will typically offer favorable terms on a home equity loan. This can include low interest rates, willingness to overlook a poor credit rating, and a higher maximum amount on the loan. Note that due to the recent federal tax reforms introduced in 2017, the interest paid on home equity loans is no longer tax-deductible.
Another type of loan that gets thrown in the same category as equity home loans is the “reverse mortgage,” a loan guaranteed by the Federal Housing Administration that allows homeowners aged 62 or older to borrow against their home’s equity. Unlike reverse mortgages, HELs are open to homeowners of all ages – including seniors.
As with a first mortgage, there are many factors to think about when choosing a lender. The most obvious is the annual percentage rate (APR), comprising the interest rate and additional fees. Some other factors to consider are: the trustworthiness of the lender; the quality of its customer service; how long the application process takes; and how much documentation the lender requires from the borrower.
Fees can vary between lenders, but they will typically include some or all of the following: appraisal fees; origination fees, title fees; and government taxes and fees. Some lenders will agree to reduce or waive surveyor or valuation fees if the borrower arranges for their own licensed surveyor to inspect the property. HELs almost always have some fees, so ask your lender the right questions and read all the fine print before agreeing to the terms of your home equity loan.
The main reason to take out a home equity loan is that it offers a cheaper way of borrowing cash than other types of personal loans. By using your property as collateral, lenders are willing to take on more risk than if they were only assessing you by your credit score.
Depending on the value of your property, home equity loans can be used to secure high loan amounts for big one-off payments. Things like college tuition and unforeseen home repairs or medical expenses can often cost hundreds of thousands of dollars, and home equity loans can be used to fund such expenses.
On the other hand, an HEL is a fixed-cost loan, and failure to repay in time could lead to the lender foreclosing on your home. For this reason, the Consumer Protection Bureau recommends borrowers speak to a credit counsellor before taking out a HEL. Another thing to consider is that the approval process for your HEL will likely take longer and involve more paperwork than for an unsecured loan.
Many of the lenders that offer conventional mortgages will also be able to offer you a home equity loan. Just as with a traditional mortgage or any other loan, it is worth comparing between lenders to find the one with the best rates and support for your needs.
The following lenders are among the top providers of home equity loans in the country:
LendingTree is an online marketplace that connects borrowers with the best mortgage, refinance or HEL to suit their needs. The platform is completely free to use. Just fill in a few details about the HEL you’re looking for, including home value and loan amount, and LendingTree will let you compare different loan terms side by side.
Sofi is one of the new players in the lending game, offering HELs, HELOCs and other types of personal loans to people of high net worth. It can offer high loan amounts at low interest rates when using your home as collateral.
Quicken Loans is one of the largest lenders in the U.S., offering loans for almost every scenario, including home equity loans. True to its name, Quicken gives you the option of beginning the process online or by phone, and to complete the entire application process and send all documentation from the comfort of your own home. From the start of the application process, Quicken provides real-time updates about the progress of your loan.
J.G. Wentworth is another innovative lender that allows you to conduct your entire application online. Whether you’re applying for a HEL or any other type of loan, this lender will keep you informed in real-time through its online portal. JGW receives good reviews for customer service; just call them during business hours to have an agent take you through your home equity loan options.