Best Home Equity Loan Lenders

A home equity loan is a secondary mortgage product that taps into your home's equity. This product is ideal for homeowners whose homes have appreciated but don't want to refinance their existing mortgage to pull cash out of their homes.

A home equity loan is typically a second mortgage — meaning it’s paid off after your primary mortgage if you default and your home is sold to pay off debt.

Home equity loan funds are disbursed in a lump sum. For the duration of the loan, you'll make monthly payments according to a predetermined repayment schedule. In most cases, a home equity loan offers a fixed interest rate so that you are not affected by rising interest rates.

Homeowners commonly use home equity loans to make home improvements, consolidate debt, make big purchases or set aside emergency cash.

An alternative use of a home equity loan is to avoid private mortgage insurance (PMI) when buying a home with a small down payment. Homebuyers who don't have a 20% down payment for a conventional loan typically must pay PMI to protect the lender. Some lenders allow borrowers to use a home equity loan to piggyback their down payment so it reaches the 20% necessary to avoid PMI.

Before using a home equity loan to access your home's equity, you need to consider the pros and cons. While you receive a lump sum of cash and fixed rates are typical, these loans can lead to a cycle of debt if you're not careful. For example, some homeowners use their home's equity to consolidate credit card debt, then max out their credit cards again.

Additionally, since it is a secured loan, a home equity loan puts your home at risk if you miss payments or default on the loan.

A home equity loan, which is usually a secondary loan to a primary mortgage, gives homeowners access to their home's equity, which is the difference between the home's value and the mortgage balance. For example, if your home is worth $300,000 and you owe $220,000 on your mortgage, you have $80,000 of equity in your home.

Depending on the lender, you may be able to access some or all of the home's equity with your home equity loan. Each lender has a maximum loan-to-value (LTV) ratio that defines how much a borrower may receive. If a lender has a 90% LTV cap, the combined balance of their primary mortgage and home equity loan cannot exceed 90% of the home's value. For a home worth $300,000, the combined maximum is $270,000.

A home equity loan is different from a home equity line of credit (HELOC), even though both are types of second mortgages that access the equity in your home. Here are some of the main differences:

• Lump sum vs. line of credit: While a home equity loan provides a one-time lump sum of cash, a HELOC gives you a defined credit limit. A homeowner can borrow and repay their HELOC numerous times throughout the draw period (typically 10 years).
• Monthly payment amount: A home equity loan has a fixed payment amount that is a combination of principal and interest. HELOCs have interest-only payments during the draw period, and then the outstanding balance turns into a loan (typically for 20 years) when the draw period ends.
• Interest rate: Most home equity loans lock in a fixed interest rate. HELOCs usually have a variable interest rate tied to a benchmark rate. This rate may go up or down, increasing or decreasing the cost of borrowing over time.
• Interest charges: With a home equity loan, borrowers start accruing interest on the full balance immediately, whether they're using the money or not. With a HELOC, you only pay interest on the portion used. If you have a zero balance, there are no interest charges.

A home equity loan and a mortgage are both secured loans attached to your home. However, there are differences between them.

Mortgages (primary mortgages) are generally in a first-lien position against the home and are used to purchase a home or refinance a home loan. Borrowers usually take out a mortgage with a 15- or 30-year term. However, other terms may be available from your lender. A mortgage may have a fixed or variable interest rate, which affects the monthly payment amount.

Home equity loans are commonly referred to as second mortgages. They are in a second-lien position behind the primary mortgage; if the borrower defaults on the loan, the home equity lender is paid off second, after the lender of the primary mortgage. Home equity loans tend to have a fixed interest rate and constant monthly payment amount, and repayment terms range from five to 30 years, depending on your lender.

To get approved for a home equity loan, you must meet certain requirements, which can vary slightly from lender to lender.

• Loan-to-value ratio: The combined balance of your primary mortgage and your home equity loan cannot exceed a certain percentage of your home's value. Most lenders allow a max combined LTV ratio of 80% to 90%. You should have at least 15% to 20% equity in your home.
• Credit score: Lenders may require minimum credit score requirements before approving an applicant. This score may range from 620 to 700, depending on the lender.
• Ability to repay: Lenders review your income and debt obligations to determine if you can reasonably add the monthly payment to your regular expenses. The lower your debt-to-income (DTI) ratio is, the higher your chances of approval. A common maximum DTI ratio to qualify for a home equity loan is 43%.

Additionally, your lender may charge fees for your loan. These are the most common fees that you'll encounter. Some lenders may waive these fees, so keep this in mind when you're comparing loan options.

• Origination fee
• Credit report fee
• Appraisal fee
• Title search fee
• Document preparation fee

Some lenders offer discounts on your interest rate if you set up automatic monthly payments. Additionally, lenders may offer relationship-based pricing to lower your interest rate or fees.

Compare multiple home equity loan lenders to find loan options with the most attractive rates and terms. Once you've found your lender, apply for your loan in person, over the phone or online.

Applications vary by lender, but as a rule, you need to provide your personal information, your property address and details, how much you want to borrow, and information about your income, assets, liabilities and monthly expenses. The lender might also ask how you plan to use the loan funds.

Banks, credit unions and online lenders offer home equity loans. You don’t have to use the same lender that originated your mortgage.

After completing your application, a loan officer will request documentation to support your application. These documents can include your most recent paycheck stubs, W-2s, tax returns, mortgage statements, property tax statements and homeowners insurance policy.

Depending on the lender, an appraisal may be required. An independent appraiser determines your home's value based on its features and recent sales of comparable homes in your local area.

While not as accurate, homeowners can get an estimate of their home's value through websites or apps like Zillow and Redfin or by speaking with a local real estate agent.

When the lender completes its underwriting, it will make a decision on your application. If approved, you'll receive a lump sum distribution to your bank account or a check. You'll start receiving monthly statements with loan details, including your minimum monthly payment and due date.

While a home equity loan is a good choice for many homeowners, it isn't the best fit for everyone. If a homeowner wants to use their equity, they can also take out a home equity line of credit, a cash-out refi, or a reverse mortgage (for seniors). Plus, there are other options available that do not put your home at risk in case you cannot make payments.

HELOC

A home equity line of credit is a revolving line of credit secured by your home. You'll receive a maximum credit limit based on your equity, your credit history, the lender’s maximum LTV ratio and other factors.

Draws can be made against your HELOC up to your credit limit during the draw period. Monthly payments for HELOCs are generally interest-only during the draw period, which is often 10 years. The interest rate is variable and based on a benchmark index.

After the draw period is over, the repayment period begins, during which you make regular monthly payments of both principal and interest. The repayment period is often 20 years.

Cash-out refinance

Instead of adding a second mortgage to your home, many borrowers refinance their existing into a new loan with a higher balance than they currently owe, taking the difference in cash. Lenders normally require borrowers to have at least 20% equity in their home, and the LTV ratio maxes out at 80%.

Keep in mind that a cash-out refinance will have closing costs similar to your original mortgage, and you will be restarting your loan term (though you may choose to refinance into a shorter-term loan).

Reverse mortgage

A reverse mortgage is a loan for older homeowners who want to withdraw cash from their home but don't want a monthly payment. The loan doesn’t have to be paid back until the borrower dies or moves out of the home. To qualify for a reverse mortgage, homeowners typically have to be at least 62 years old and have significant equity in their homes.

0% APR credit card

For a smaller loan amount, a 0% introductory annual percentage rate (APR) from a credit card may be a better choice. It is an unsecured loan, so your home is not at risk. And some of the best 0% APR credit cards offer no-interest financing for almost two years.

However, if you do not pay off the balance before the intro period expires, the unpaid balance reverts to the standard interest rate, which can be much higher than a home equity loan or mortgage.