If you're a homeowner, you may be sitting on a golden egg—your home's equity. Whether the housing market has risen, driving up the value of your home, or you've just faithfully made mortgage payments over the years, you may now have a substantial amount of equity that you could borrow against. A home equity loan can be a convenient and cost-efficient way to obtain money for home renovations, debt consolidation, or some other big-ticket item. But where should you look for the lowest interest rate on one?
- Home equity loans use your home as security, so their rates are often lower than other forms of borrowing.
- Credit unions, small local banks, large national banks, and online lenders all offer home equity loans.
- Interest rates vary from lender to lender.
- Fees are another important consideration in comparing loan costs.
What Is a Home Equity Loan?
A home equity loan is a lump-sum loan secured by your home. The interest rate you'll pay can vary from one lender to another and also according to your personal creditworthiness. Home equity loans tend to have considerably lower interest rates than credit cards or personal loans, which are generally not secured, and you can use one for any purpose you wish. Your payback period can be anywhere from five to 30 years.
Like regular mortgages, home equity loans have closing costs, such as origination fees, recording fees, and appraisal fees. To do a fair, apples-to-apples comparison of the rates charged by different lenders, you'll want to focus on each loan's annual percentage rate (APR). In addition to the loan's basic interest rate, the APR takes some of the loan fees into account, giving you a more accurate picture of what you'd really be paying to borrow. You'll also want to make sure you're comparing loans with the same terms or lengths. That can affect their rates, as well.
Home equity loans typically have fixed, rather than variable, interest rates, so once you've signed up for one, your payments should be predictable and not result in any unpleasant surprises.
Many experts suggest borrowers speak with at least three different home equity loan lenders and let them know you're shopping around. Not only can this result in lower rates, but some lenders may also reduce or waive certain closing costs if they think they can earn your business that way.
Where Can You Get a Home Equity Loan?
Home equity loans are available from many banks, credit unions, and online lenders. Here are some of the pros and cons of each.
Big banks vs. small banks
It's the eternal question—David or Goliath? When you're looking for low interest rates on a loan, there's no clear-cut answer to which is better. In broad comparisons, similar interest rates can be found at small or regional banks as at large national banks. But within each category, rates can vary widely.
While the small town bank may know your name, its rates may or may not be competitive. Still, if you already have an account at a local bank, it's a good place to start your search for a home equity loan. It may have an extra incentive to offer you a lower rate or some reduced fees in hopes of keeping your business.
One thing to be aware of is that some banks stop issuing new home equity loans and home equity lines of credit in volatile markets. For example, as of June 2022, Citi and Wells Fargo aren't offering home equity loans. U.S. Bank does offer home equity loans and Bank of America only provides home equity lines of credit with a variable interest rate.
Credit unions are another option to consider. Since credit unions are not-for-profits that are in business to serve their members, their interest rates are often more attractive. That can mean higher interest rates paid on deposit accounts and lower ones charged on loans.
Credit unions require a membership, but many have broadened the rules so that almost anyone can join. Before you jump through any hoops to join a credit union, though, check the interest rates it has available. And, as with local banks, if you already do business with a particular credit union, it could be a good place to start your home equity loan shopping.
Online mortgage companies
Like many online banks, online mortgage companies can offer highly competitive rates since they don't have the same overhead as brick-and-mortar institutions. For example, Discover, Figure, and Spring EQ through SoFi all offer home equity loans with interest rates that are competitive with those at banks and credit unions.
What's the Difference Between a Home Equity Loan and a Home Equity Line of Credit?
With a home equity loan, you typically receive a one-time lump sum of money that you then repay over time. With a home equity line of credit (HELOC), the lender provides a credit line that you can draw on as needed, up to an agreed-upon limit.
How Much Money Can I Borrow on a Home Equity Loan?
The amount you can borrow depends on the equity you have in your home. Most lenders prefer borrowers to have at least 20% equity before they'll issue a loan. Most also limit their loans to no more than 80% of your equity. Some smaller lenders cap home equity loans at $250,000, but others offer loans of up to $500,000. In addition, most lenders have a minimum threshold of $10,000 to open a home equity loan.
What Happens if I Default on My Home Equity Loan?
If you fail to make the payments on your home equity loan, you risk losing your home. Since your home is used as collateral for your loan, the bank can repossess it and sell it to repay the loan if you can't pay it back.
The Bottom Line
Finding the best rate on a home equity loan can require some shopping. There's no hard and fast rule about what kind of institution has the best rates; it varies from one lender to another.
If you're overwhelmed by the options, you might consider working with a mortgage broker who has experience in the home equity loan market. A broker can shop for you and bring you competitive rates from several lenders. The Federal Trade Commission suggests checking the National Multistate Licensing System website to make sure that you're dealing with a legitimate one.