How to find the best home equity loan options

Features to look for when finding the best home equity loan

When it comes to finding the best home equity loan for your needs, there are several key features you should consider. By evaluating these features carefully, you may increase your level of confidence that you are getting the best deal and terms for your financial situation.

• Interest rates: Very often, finding the best home equity loan options means getting the best home equity loan rate. Though this isn’t always the case, interest rates are one of the most important factors to consider when comparing your options. A lower interest rate may save you money in the long run, so it’s crucial to find a loan with a competitive rate. Take time to shop around and compare rates from different lenders as a part of your research process.
• Loan terms: Look for loans with flexible terms that fit your needs. Consider the length of the loan and whether it offers a fixed or a variable rate. A longer term may provide lower monthly payments, but it may also result in paying more interest over time. A loan with a shorter term may mean higher monthly payments, but if the amount fits easily in your budget, you may be able to look forward to paying less in interest charges when compared to a longer term.
• Loan amount: Determine the amount of money you need and find a lender that offers loan amounts that meet your requirements. Some lenders have minimum and maximum loan limits, and the size of the loan may impact the rate offer you receive.
• Fees and closing costs: Borrowing against your home may come with additional fees you need to budget for. One lender may offer a low interest rate but charge high closing costs, while another lender may offer a slightly higher rate  but not charge any closing costs or fees. Depending on what fees a lender charges you, the lower-rate option could potentially cost you more money over the life of the loan.
• Repayment options: Find out if the loan you want has a prepayment penalty where a lender could charge you extra fees if you want to pay off your loan before its term is over. Additionally, consider whether the loan has flexible payment options such as bi-weekly or monthly payments. Understanding the repayment options may help you choose a loan that aligns with your goals and help you determine what range of interest rates you’re comfortable with.
• Customer service: Taking out a home equity loan means you’re starting a relationship with a lender for potentially many years to come, so it’s important to consider their customer service record before making your final choice. Look for lenders that are easily accessible and responsive to their customers’ needs. Read reviews and check out ratings to get an idea of the type of service you can expect from the lender you want to work with.

Finding your best home equity loan rate

• Competitive interest rates: The interest rate on a loan is essentially the cost of borrowing money, and finding the lowest rate possible may be one way to try and save money over the life of your loan. You can use a payment calculator online to get an idea of the rate you may be eligible for based off of your credit score, home value, mortgage balance, and desired loan amount.
• Fixed or variable rates: Home equity loans may come with fixed or variable interest rates. A fixed interest rate will remain the same throughout the life of the loan, while a variable interest rate can change over time. Fixed rates provide more stability and predictability, while variable rates may offer lower initial rates but could change while you’re paying back the loan. Depending on your financial goals and appetite for risk when it comes to potentially making larger monthly payments, you should select a loan that comes with the type of rate that works for your budget.
• Annual percentage rate (APR): Combining interest rate and any fees associated with your loan, APR expresses the total cost of borrowing money as a percentage value. Lenders are required to give you specific disclosures about your APR, so you can use this value to compare multiple lenders and get an idea of who has the best deal for your situation. You may want to pay attention to these details because a higher interest rate on a loan with no extra fees may result in a lower overall APR, even though that might not be what you would assume up front.
• Loan term length: The length of the term of the loan is also an important feature to consider when looking for the best home equity loan rate. Not only will the term length determine the size of your monthly payment, but you may also be eligible for different rate offerings depending on whether you select a 15-year vs. a 30-year loan, for example.
• Closing costs and other fees: You also need to consider fees and closing costs associated with the loan. Some home equity loans have application fees, appraisal fees, and closing costs. Others have prepayment penalties for making extra payments during the loan term or paying off the entire loan before the full term. If you plan to hold the loan for its full duration, paying origination fees on a loan with a lower APR may make sense. If you plan to pay down the loan quickly, a lower or no-fee loan may be better. These costs can vary from state to state and from lender to lender, so follow up with a personal banker to receive an accurate quote before making your decision.

Determine your eligibility for the best home equity loan rates

There are a few things that lenders may look at when determining the rate they give you on your home equity loan, such as debt-to-income ratio (DTI), loan-to-value ratio (LTV), credit score, and location. Here are some of the metrics you may expect to see used by lenders and what you can do to improve them:

• Debt-to-income (DTI) ratio: The debt-to-income ratio is calculated by dividing your total monthly debt obligations (including the new loan) by your total monthly gross income. For example, if you make $6000 per month before taxes and pay $2,000 a month in debt (including a mortgage payment), your DTI would be 33%. It is common to find that lenders only approve a loan when your DTI ratio is lower than 43%. However, the DTI cap may vary from lender to lender. How to improve it: Since the only two inputs for DTI are your debt and your income, you may be able to improve your DTI ratio by increasing your income, decreasing your debt, or both. For most people, paying off debt is the easiest way to improve DTI.
• Loan-to-value (LTV) ratio: The loan-to-value ratio is calculated by taking the outstanding debt secured by your house such as your existing primary mortgage, and dividing that by the total value of your home. If your home is appraised at $350,000 in value and you still owe $150,000 on your existing mortgage, you would have an LTV ratio of about 43%. For this example, add in a $50,000 home equity loan and the combined loan-to-value (CLTV) ratio rises to 57% as the CLTV represents the total amount of your existing mortgage plus the amount of the new second mortgage loan divided by your home value. You may find opportunities to borrow up to a CLTV of 80-90%, depending what’s allowed by the lender you select. How to improve it: To influence your loan-to-value ratio, you can either decrease the loan amount by applying for a smaller loan or paying down your existing mortgage. Depending on housing trends where you live, it’s also possible that your home value may rise and reduce your LTV.
• Credit score: Your credit score may tell a lender how likely you are to pay your debts off on time and in full. Lower credit scores may lead to higher interest rates, and homeowners with higher credit scores may get the best home equity loan rates available in the market. How to improve it: Fortunately, credit scores may be the easiest factor to improve on this list. To learn more about building your credit, check out our comprehensive guide on credit building.
• Location: Another factor that could potentially impact your interest rate is the location of your home. While there is nothing you can do to change the location of your home, knowing that it may influence your interest rate is important. The good news is that location doesn’t tend to substantially affect interest rates. For instance, interest rates may be half a percent higher in New York than in Connecticut. How to improve it: There aren’t particularly any steps you can take to change this, but it’s important to discuss this with a personal banker familiar with the state-to-state or city-to-city differences and laws about the impact they have on the default rate of the area.

Choosing the best home equity loan lender

While low rates can be attractive, don’t overlook the importance of choosing a great lender. After all, you’ll be trusting that lender with a substantial amount of equity in your home, so you should be certain that you’re partnering with a company you can trust.  Here are a few things you should look for in a great lender:

• Perks and features: When applying for a home equity loan, you should consider the features and incentives lenders offer. Some lenders may offer $0 closing costs while others may offer you increased interest rates on checking or savings accounts if you borrow from them. Be sure to consider these into your decision when choosing a home equity lender as some lenders offer a substantial amount of value through these perks.
• Customer service record: Customer service is important when working with a bank or lending institution. When you’re trusting a lender with such a substantial amount of money or equity, it’s important to get accurate and helpful answers from them in a timely manner.
• Home equity loan terms: Terms and product offerings may vary greatly between lenders. Some lenders may not have 5-year terms, while others might not have 30-year terms. You should pursue a lender that has the term that matches your needs.

What is the best home equity loan for you?

Although home equity loans are a great way to tap into your home’s equity, they’re not the only type of loan that lets you borrow using your home as collateral. In addition to a home equity loan, you can also use a home equity line of credit (HELOC) or a cash out refinance. Comparing each type of loan can help you decide which option works best for your needs:

• Home equity loan: A home equity loan is a second mortgage that doesn’t replace your current home loan. Instead, you tap into your home’s equity to pull cash that can be used for anything you want. Home equity loans typically have fixed rates and set loan terms making it easy to budget for monthly payments. Much like mortgages, you receive a lump sum of money upfront and then pay it back over time. It’s possible to find lenders that offer home equity loans with terms lasting between 5-30 years.
• Home equity line of credit (HELOC): Home equity lines of credit are another type of second mortgage. Unlike home equity loans, HELOCs are revolving lines of credit, so you would pull cash from your home equity as needed instead of getting a lump sum at the beginning of the loan. HELOCs typically come with variable interest rates, so rates could increase over time. With a HELOC, you are given a credit limit that you can draw on during the “draw period” of your loan, which typically lasts ten years. During the draw period, you may only be required to pay off interest each month, but you can also choose to put money toward the principal. Once the draw period is over, the loan enters a repayment period, where you make monthly principal and interest payments until the loan is paid off. While Discover Home Loans doesn’t offer HELOCs, you can apply for a home equity loan at Discover to get a low, competitive fixed interest rate with no origination fees, appraisal fees or closing costs.
• Cash out refinance: A cash out refinance may be a great way for people to tap into their home’s equity without adding a degree of complexity to their finances. Unlike a home equity loan or HELOC, a cash out refinance replaces your existing mortgage. With a cash out refinance, you borrow more than your current loan’s balance and take out the difference as cash. It’s often best to use a cash out refinance if interest rates available to you are lower than your existing mortgage or if you have built up considerable equity in your home and don’t want to deal with the hassle of a second mortgage.

Closing thoughts: Finding the best home equity loan for you