If you have faithfully made monthly mortgage payments and (hopefully) seen the value of your home increase, you are building home equity, which can become a life raft for homeowners needing financial help.
Having significant equity in your home gives you access to a home equity line of credit (better known as a HELOC) and a home equity loan, which are slightly different versions of the same thing: cheap borrowing opportunities that help responsible homeowners solve financial problems.
“Both types of loans are valuable to homeowners because they typically have favorable interest rates,” Bob Pozen, senior lecturer at the Sloan School of Management at MIT, said.
Home equity loans and HELOCs can be used to help pay off home improvement projects, college tuition, student loans or maybe even consolidating high-interest credit card debt.
The trick for most American consumers is identifying what lending institution will offer them the best opportunity to take advantage of their home equity.
Five Best Lenders for Home Equity Loans
The primary features of a home equity loan are that you receive a lump-sum amount and your repayment is made in monthly installments at a fixed-interest rate. The predictability of home equity loans should be a key factor in deciding what type of loan to take.
“I recommend fixed-rate loans since they carry less risk than a variable rate mortgage in these times of rising interest rates,” said Pozen, who also is chairman of the Board of the Tax Policy Center and frequently writes for the New York Times, Wall Street Journal and Financial Times.
“If the borrower knows how much he or she will need, getting a home equity loan with a fixed rate and term is typically a better approach.”
So, where can you get the best home equity loans? Banks are an obvious source, but you might find better rates and terms at credit unions or online sources.
It’s easier than you think to join a credit union and because they are operated by the members, they can bend boundary lines to help out a fellow member. Online lenders are investors and like all investors, some are more willing to take a risk than others.
Here is a look at the five best places Debt.org found for home equity loans:
- Navy Federal Credit Union. The most attractive features here are no closing costs and no minimum credit score, so if your credit is not the best, you still may qualify. However, you will need to join NFCU to get the best rates and conditions, which could include borrowing 100% of the value of your home. Interest rates in fall of 2018 were between 4.87% and 8.97% APR, depending on amount borrowed and combined loan-to-value percentage.
- Discover Bank. If you have a modest credit score – something as low as 620 – this might be your best choice. Discover charges no closing costs, offers a 0.25 discount for autopay and will lend between $35,000 and $150,000. Interest rates in the fall of 2018 were between 4.99% and 11.99% APR.
- TD Bank. It would be tough to beat TD’s rates, which are lower than the competition at almost every level. Minimum home equity loans start at $25,000 and go above $500,000. There is a 0.25% discount if you pay with TD Bank personal checking. Interest rates in the fall of 2018 were from 4.09% to 10.26%.
- PNC Bank. What if you only wanted to borrow $1,000? It’s possible here. There is a 0.25% discount if you pay using a PNC checking account and there are minimal closing costs that make this a lender worth considering. Interest rates in the fall of 2018 were from 4.89% to 6.24%, based on amount borrowed and number of years for repayment.
- This is another inexpensive stop for a home equity loan with no charge for application, origination, home valuation or cash required at closing. Repayment terms are very flexible, ranging between 10 and 20 years. Interest rates in the fall of 2018 ranged from 4.99% to 11.99%, based on credit rating.
Five Best Lenders for HELOCs
Home equity lines of credit are a slightly different animal than home equity loans and getting more popular. In 2018, more than 340,000 HELOC loans were originated in just the first quarter, a jump of 14% from the previous years.
HELOCs typically have higher interest rates than home equity loans and function more like a credit card because you have a revolving credit line. What that means is that if you borrow $25,000 for 10 years and use $10,000 for some purpose the second or third year, then repay $5,000 of that quickly, you still have $20,000 left in your account.
HELOCs also have a draw period (time in which the money must be used) and a repayment period. Both generally run 10 years each, but this does vary from lender to lender.
The biggest difference, however, is that HELOCs start with a variable interest rate. That rate is based on an index (usually the prime rate plus a margin) and will vary every year. It might go up. It might go down.
“The big advantage of a HELOC is its flexibility — the borrower can draw down the line of credit as he or she needs the monies and can repay the loan in a relatively flexible fashion,” Pozen said. “In addition, having a line of credit readily available may allow certain borrowers to make quick decisions to buy goods or services through debt without sufficient planning or financial discipline.”
HELOCs are better for consumers who want access to money over a staggered amount of time. You might use some of the loan to pay college expenses over a 4-5 year period and later use it to remodel your house or pay off an unexpected medical expense.
Here are five of the best places to shop for a HELOC:
- TD Bank. They offer what appears to be a home-run incentive for consumers with great credit – prime rate minus 0.51% — but there’s a catch with that. You must pay an annual fee of $50. However, there are no closing costs if your loan is under $500,000, which is a plus.
- BB&T Bank. Same thing, only slightly lower. High-end credit scores could qualify for a variable rate of prime minus 0.26%. Those with lesser scores pay anywhere from prime to prime plus 1.5%. And there is an option to lock in a fixed rate and term at some point.
- Navy Federal Credit Union. You pay no application, origination, annual or inactivity fee. You have a 20-year draw and 20-year repayment period and can borrow up to 95% of your home’s equity. Interest rate in the fall of 2018 was as low as 5.5% for most qualified customers.
- SunTrust Bank. Has an “introductory offer” of just 3.74% for the first 12 months of the loan. Offers the usual variable rate repayment plan, but you can switch to a fixed-rate loan that has some restrictions. Interest rates in the fall of 2018 for variable loans was 5.64% APR.
- Connexus Credit Union. You can get a loan of as little as $5,000 here with reasonable interest rates. The rates change every six months. The introductory rate in September of 2018 was 3.5%, but that will go up to 5.88% in April of 2019.
Home Equity Warning Signs
As with all financial transactions, it’s best to go in prepared. Do your homework and read all the fine print in a home equity loan or HELOC agreement, regardless of which one you choose, to make sure you’re aware of all charges and conditions of your loans.
Some of the things to look for AND ask about include:
- Is there a prepayment penalty?
- Are there transaction fees involved?
- Do I have to maintain a certain deposit level at the lending institution?
- With a HELOC, is there a minimum required drawdown?
- Is the lender asking you to pay insurance on the loan or refinance it multiple times?