If you own a property, the value of that property minus the outstanding mortgage is known as equity. With a home equity loan (HEL), you put that equity down as collateral in order to borrow money.
What is a Home Equity Loan?
With a home equity loan often known as a “second mortgage” the borrower receives a one-off payment from the lender, and the size of the equity goes down relative to the size of the loan. When you receive an equity loan, your terms will include additional interest and fees, and as you repay the loan, your equity will increase. A home equity line of credit (HELOC), is a line of credit taken out against your equity, but you only have to pay back what you use from the credit line.
How Does a Home Equity Loan Work?
Applying for a home equity loan is similar to applying for a mortgage and if you have equity on your property, you can potentially receive one. If you’re applying for a home equity loan, you’ll need to provide much of the same information and documents as you would for a standard mortgage. This includes things like your credit score, proof of income, and outstanding debts.The lender will also want you to have your home professionally appraised, in order to get a clear idea of what the home is worth and how much equity you have on your original mortgage. Different lenders have different limits on how much they’ll let you borrow against your equity, with some allowing you to borrow up to 80%-90%. The lenders do this by looking at the combined loan to value ratio, which looks at how much you owe on your first mortgage and the HEL as a percentage of your home’s appraised value. If the loan is being used to renovate our home, the interest you pay to the lender is tax-deductible. This is not the case if you are using the equity loan for expenses that aren’t related to the home.
What Are the Best Home Equity Loan Companies?
|Terms||Credit Score||User Fee|
10, 15, 20, 30 years fixed, 5/1, 7/1 ARM
5, 7, 10, and 15 years
3% origination fee
15 to 30 years fixed, 5/1, 7/1, or 10/1 ARM
15, 20, 30 years fixed, 3-, 5-, or 7-year ARM
Closing fees around 3%
Varies by lender
- Get up to 5 free quotes
- Max draw of 80%-90% of home equity
- Loan-to-Value ratio of 80%
- Free credit scoring
- No user fees
- Can lead to repeated solicitations from home equity lenders
- No live chat customer service
Best for: Home equity line of credit with low closing costs
LendingTree is an easy-to-use website that can put you in touch with all types of lenders competing for your business, which should help you find a home equity loan with better terms. With LendingTree there is no user fee charged by the service. While other lending houses have strict credit requirements, on LendingTree you only need to have a credit score of 620 or higher, and the service also provides free credit scoring to customers. In addition, LendingTree is flexible, and can find you fixed-rate loans of 10, 15, 20, or 30 years, and adjustable rate loans of 5/1 and 7/1. With LendingTree the application process shouldn’t take more than about 10 minutes or so. Afterwards you’ll be able to see multiple offers from a wide range of lenders at the same time, all within a matter of seconds.