You have your eye on a basement remodel and have decided to take out a home equity loan to help pay for it. Now it's time to find a lender that has it all—low interest rates, reasonable fees, and a repayment plan that suits your monthly budget. If you already have a mortgage on your home, it's easy to assume that you should go to that lender for your home equity loan. But is it always the best choice? Here's what you need to know.
- Home equity loans use your primary residence as collateral.
- Your current mortgage lender may offer you a lower interest rate or discounted fees on a home equity loan for keeping all of your loans in one place.
- Even so, it's worth comparison shopping to make sure you're getting the best deal.
How Does a Home Equity Loan Work?
A home equity loan is secured using your primary residence as collateral. Your equity is determined by subtracting the amount you owe on your mortgage from your home's current market value. As you make your monthly mortgage payments, your equity grows. Home improvements and an appreciating housing market can also increase your home's value and your equity.
With a home equity loan, you receive a lump sum of cash from the lender that you can use for whatever you want. Many people use it for home improvement projects or to pay down high-interest debt like credit cards. The interest rate on a home equity loan tends to be a bit higher than on a regular mortgage because, in the event of a foreclosure, the mortgage would be paid back first and that might not leave enough money to fully pay off the home equity loan.
Home equity loan interest can be tax-deductible if you use the money "to buy, build or substantially improve the taxpayer's home that secures the loan."
Like regular mortgages, home equity loans often have fees attached. Those can include application or origination fees, an appraisal fee, a credit report fee, and document prep fees.
Your current lender may only be able to budge so much on the interest rate, but it might have the flexibility to reduce the fees it charges. So don't hesitate to ask if it will waive or at least discount any appraisal, application, or document fees, for example.
Is There a Benefit to Borrowing From Your Current Lender?
Many lenders will offer loyalty discounts to current customers when they're shopping for a home equity loan or other loan product. That might come in the form of a reduced interest rate, waived or discounted fees, or some combination of those. If the discount is significant enough, it could be worth sticking with your primary lender.
In addition, some borrowers may simply find it convenient to keep all their loans in one place, especially if they've been generally satisfied with their mortgage lender's service.
Note that if your lender offers to roll your fees into the loan, it isn't doing you any great favors. While that will save you some upfront out-of-pocket costs, the fees will simply be added to your loan balance and you could be paying interest on them for years to come.
Is There a Benefit to Shopping at Other Lenders?
As with any large purchase, comparison shopping can yield the best prices. It's always advisable to look at multiple lenders for a home equity loan—and to let them know that you are doing so. When lenders know they are not the only game in town, they will likely be more willing to reduce or waive fees or work harder to get an interest rate or payment term that fits your needs.
While going with a different lender may mean yet another online payment setup, it could save you thousands over the life of your loan in interest and fees.
Where Can You Get a Home Equity Loan?
Home equity loans are widely available from banks and credit unions, as well as some specialized lenders.
How Much Money Can You Borrow With a Home Equity Loan?
The amount you can borrow depends on how much equity you have in your home. Most lenders will only allow you to borrow up to 80% of your available equity, even if your home is completely paid off. This is to protect the lender in the event of a default.
What Are the Repayment Periods for Home Equity Loans?
Home equity lenders offer a great range of choices in their repayment terms. Depending on what works best for you, you can get a loan with a term as short as five years or as long as 30 years. The longer the loan term, the more the loan is likely to cost you by the time you've paid it off.
Can You Pay Your Home Equity Loan Off Early?
Paying your balance off early can save you thousands of dollars in interest over the life of your loan. Generally speaking, most home equity loan lenders don't charge early payoff fees, but there can be exceptions to that rule. So it's wise to ask your lender before you sign the contract, just in case.
The Bottom Line
If you have a good relationship with your current lender, you may be able to negotiate a better deal on a home equity loan than you'd get elsewhere. But you won't know for sure unless you also comparison shop. So shop around and let your current lender know that you're looking. If it wants to keep your business, it may come up with an improved offer.