1. Home
  2. Mortgages
  3. Mortgages
  4. Home Equity Loans

Best Home Equity Loan Lenders

Author picture
Written by Lee Huffman
Edited by Jana Lynch

With home prices recently at all-time highs, homeowners are considering tapping their home's equity to finance purchases. Whether it's to finance home improvements, consolidate debt, pay for college or something else, a home equity loan can be a good option for a relatively low-interest-rate loan.

Before submitting your application, compare the best home equity loan lenders, understand the pros and cons of this type of loan and learn about other alternative financing options.

Why trust ConsumerAffairs?
  • Our recommendations are based on what reviewers say.
  • 4,011,174 reviews on ConsumerAffairs are verified.
  • We require contact information to ensure our reviewers are real.
  • We use intelligent software that helps us maintain the integrity of reviews.
  • Our moderators read all reviews to verify quality and helpfulness.

Compare Top Home Equity Loan Reviews

Sort
  • Best Rated
  • Most Reviewed
  • Highest Rated

What is a home equity loan?

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.

Pros and cons of home equity loans

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.

Pros

  • Access to home equity without refinancing mortgage
  • Fixed interest rate and monthly payment
  • Use the funds for nearly any purpose

Cons

  • Additional mortgage payment
  • Higher interest rate than primary mortgage
  • Risk of home loss if you default

How does a home equity loan work?

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.

Home equity loan vs. mortgage

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.

Home equity loan requirements

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.

How to get a home equity loan

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.

Home equity loan alternatives

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.

FAQ

What is equity in a home?

The equity of your home is the difference between the home's value and the mortgage balance owed. For example, if your home is worth $400,000 and you owe $250,000 on your mortgage, you have home equity of $150,000, or 37.5% equity.

How do you get a home equity loan?

Apply for a home equity loan through a bank, credit union or other lender. In most cases, you can apply online, over the phone or by walking into a branch. You should have at least 15% to 20% equity in your home, a credit score of at least 620 to 700 and a DTI ratio under 43%.

What can I use a home equity loan for?

There are few limits on what you can use a home equity loan for. Many homeowners use home equity loans to make home repairs or improvements, consolidate high-interest debt, pay for education or make a big purchase.

How does a home equity loan affect your credit score?

When you apply for a home equity loan, your credit score will temporarily drop from a hard credit inquiry. As long as you make monthly payments on time, your score should recover. A home equity loan can positively affect your score by building payment history and increasing the length of your credit history. On the other hand, if you don’t make payments on time — or, worse, the missed payments lead to foreclosure — your credit score will drop.

Is a home equity loan worth it?

A home equity loan can be worth it if you have enough equity in your home and can afford to make all of your payments. Many experts say a home equity loan is especially worthwhile if it’s used to increase the value of your home. It can also be a good idea if you plan to consolidate high-interest debt (as long as you are also changing any bad spending habits that led to the debt).

Not sure how to choose?

Get buying tips about Home Equity Loans delivered to your inbox.

    By entering your email, you agree to sign up for consumer news, tips and giveaways from ConsumerAffairs. Unsubscribe at any time.

    Thank you, you have successfully subscribed to our newsletter!

    Compare Top Home Equity Loan Reviews

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page. Specific sources for this article include:
    1. Federal Trade Commission, “Home Equity Loans and Home Equity Lines of Credit.” Accessed Aug. 31, 2022.
    2. Consumer Financial Protection Bureau, “What is a home equity loan?” Accessed Aug. 31, 2022.
    3. Consumer Financial Protection Bureau, “What is a second mortgage or junior lien?” Accessed Aug. 31, 2022.
    4. Consumer Financial Protection Bureau, “What is a piggyback second mortgage?” Accessed Aug. 31, 2022.
    Comparing

    ×