Home Equity Loans: What You Need To Know

Home Equity Loans

A home equity loan is often called a second mortgage because you also put your home and its equity as collateral. This option is usually chosen by people who need a large amount of money with a low APR, such as for home renovation or education expenses.

To qualify for this loan, you must have a FICO score above 620-650, a minimum of 15% equity in your home, and a steady income. It is essential to understand that due to the stages of home appraisal, the process can take up to 3 months; that's why this is not an option for everyone.

Often home equity loans are used for debt consolidation, which is a wise financial decision because it has a lower APR and a more extended repayment period than standard personal loans. However, you need to choose a suitable lender for this option to be beneficial.

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Best Home Equity Loan Lenders of 2022

We've handpicked the six best lenders of 2022 for you so you can save time and turn to a reliable financial institution. We considered vital credit characteristics such as loan size and repayment period, APR, and borrower requirements when compiling this list.

Check out the options below and choose the one that suits you best. 

KeyBank

Key Bank

KeyBank is one of the long-established banks in the United States that deals with large loans such as mortgages and home equity loans, as well as savings and investment accounts. This bank's loan terms and conditions are as follows:

  • The minimum amount for HELOCs is $10,000, and $25,000 for home equity loans. 
  • The maximum term is 30 years; the minimum is five years. 
  • CLTV must be no more than 80% (i.e., new loan and your existing mortgage balance should add up to 80% of your current home value).  
  • APR is fixed and depends on your state. For example, the APR range in Alaska is 7.5% to 10.5%.

KeyBank offers a 0.25% APR discount to bank users with a checking or savings account. However, it also has a few drawbacks:

  • You can only get this credit in 15 states. 
  • You must pay early termination fees if you repay the loan early. 
  • You also have to pay an origination fee of $295 if you get a HELOAN or $50 a year if you get a HELOC.

Overall this is a good option for anyone who lives in AK, CO, CT, ID, IN, MA, ME, MI, NY, OH, OR, PA, UT, VT, or WA and wants a loan from a reputable financial institution. It's best for fixed home equity loans.

Spring EQ

Spring EQ

Spring EQ is an excellent option for anyone with a FICO score of 680 or higher. In addition, this financial institution will allow you to get up to 90% of your home equity, the highest score among competitors.

Spring EQ is best for fast funding because you can get a loan in as little as 11 days from your application's approval. However, you must submit all documents on time (if self-employed, remember to provide proof of income), and your DTI ratio must be at most 50% before receiving a new loan.

The terms and conditions of home equity loans at Spring EQ are as follows:

  • APR range is 5.205% up to 13.153%. 
  • The maximum size is $500,000. 
  • You will have to pay for administration, credit report and flood certification, document prep, title report, and other fees.

This is an excellent option for anyone with a high FICO score.

Discover

Discover Home Equity Loan

If your FICO score exceeds 620, this is the best option because of the low interest rates. Discover's APR rates start at 7% and up to 13.5%, and payback periods of up to $300,000 can be as long as 30 years.

The main advantage of Discover's great bank is that it operates throughout the United States. The company offers favorable terms on all types of loans and does not ask you to pay various fees, such as origination, application fees, and home valuation fees.

In addition, you do not need a lot of documents to get a loan here - all you need is to provide your Social Security number, proof of income and employment, and tax returns.

The only disadvantage of this lender is that you have to pay up to $500 in prepayment fees if you pay back the loan in more than 36 months. Borrowers must also have a low debt-to-income ratio of up to 43%, which can be difficult for many people with financial difficulties.

BMO Harris Bank

BMO Harris Bank

You can get a small loan of up to $150,000 secured by the equity in your home here. It will have a maximum repayment period of 20 years, and you won't even need to leave your home to get the money, as the bank accepts all applications online from any state.

The main disadvantage of this option is that the lender does not want to work with borrowers whose FICO score is below 700 points. However, at the same time, it is one of the few lenders that allows you to get a loan for five years or more at such a low APR (7%-12%).

The maximum repayment period of a home equity loan from BMO Harris Bank is 20 years. You only need essential documents such as the Social Security number, proof of income and employment, and information about debts and other financial obligations to get the money.

If you have excellent FICO score, you can apply to this bank, but you can look at other options, as some lenders offer a 5.5% APR for borrowers with this rating.

Third Federal

Third Federal

Third Federal is a great bank that provides excellent loans and deposits to residents of all states. It is known for its low interest rates and no extra fees, so if you want to get up to 80% of your home's value in a loan at 5.8%-9% APR, you can turn to ThirdFed.

Users highly praise the bank and say it's best for customer support. On the Better Business Bureau website, it received the highest rating for providing customers with helpful tools (mobile app and home equity calculator) and a customer support team that answers all questions quickly.

The main drawback of this option is that the lender does not disclose their credit requirements (such as a minimum FICO score), so you will have to apply for a loan and pass a hard credit check before you know if you can get a loan here.

At Third Federal, you can get a HELOAN from $10,000 to $200,000 for 5-30 years and pay just one annual fee of $65.

Flagstar Bank

Flagstar Bank

Flagstar allows you to get some of the biggest loans in the United States for Americans living in California, Indiana, Michigan, Ohio, or Wisconsin. The maximum repayment period of such a loan will be up to 20 years, and the amount can be up to $500,000.

Another plus of this option is the low APR, which starts at 7.79%. In addition, if you sign up for automatic monthly payments on the bank's website, you'll get an additional discount on a 0.25 percent rate.

Like many other major lenders, Flagstar does not disclose requirements for its borrowers, which is a significant disadvantage. For example, the bank does not state a maximum LTV or minimum debt-to-income ratio that borrowers must have, nor does it name FICO score requirements.

But we know that the bank does not charge extra fees if you pay off the loan early but does ask for home insurance when you apply. So overall, Flagstar is best for outstanding loans at a low APR.

What a Home Equity Loan Is

A home equity loan is also commonly referred to as a second mortgage, which is a loan that allows you to borrow a large amount of money against the equity in your home. This type of loan has several key features:

  • You don't determine the loan amount; it's calculated after an appraisal of your home and is based on the difference between your home's current value and your first mortgage balance due.
  • These loans usually have a fixed interest rate. However, a second option, home equity lines of credit, allows borrowers to have revolving lines of credit.
  • To qualify for this loan, you need a FICO score of 620-650.

Although this option is often more advantageous than personal loans, there are many things you should be aware of before choosing it.

What a Home Equity Loan Is

How a Home Equity Loan Works

A home equity loan is the second mortgage where your house serves as collateral. It works on a simple principle:

  • You go to a lender and choose the type of loan: fixed-rate or revolving line of credit. 
  • Then you go through a credit check. You also provide documentation and an estimate of the value of your home. 
  • The lender offers you possible loan terms. Usually, the loan amount is determined by the following formula: (the value of your home - the amount of your first mortgage) * 85%. 
  • If you choose a traditional mortgage with a specific payment plan, you get the amount deposited into your account and pay it back in small monthly installments.

It is important to remember that in this situation, you are getting a loan secured against your home, and you could lose it if you do not pay it back on time. Also, the value of your property in the market is unstable, so if you want to sell it at some point, you might lose some money. 

Home Equity Loan Requirements

It is easy enough to get a home equity loan. However, you must have a minimum FICO score of 620-650, and you must meet the following requirements: 

  • Equity (the difference between the value of your home and the amount of your first mortgage) in your home must be at least 15 percent. 
  • You must have a high income and a low debt-to-income ratio (DTI) of up to 40 percent. 
  • Your credit history must not show missed payments, collection accounts, or bankruptcies.

Borrowers usually understand all of the lender's criteria but can't figure out how to determine how much of a loan they might qualify for. So let's take a concrete example and do the math together to make it easier for you to understand these concepts.

Suppose you have a house with a current market value of $400,000 and a mortgage with a balance to pay of $150,000. Lenders usually allow you to have an amount not to exceed 85% of the value of your home, which is $340,000.

Since you already have your first mortgage, you can borrow another $340,000 - $150,000 (mortgage balance) = $190,000. But remember, this is the maximum you can do.

Home Equity Loan Requirements

What Is Home Equity Loan Good For?

A home equity loan allows you to borrow a large sum of money, which can be used for almost any purpose. The most popular ones include the following:

  • Home Improvements.

This reason is the most popular, as making the home a more comfortable place for the family is the goal of many families. Also, if you want to sell your home, updating it before doing so can be a good idea, as it will increase its value and value in the eyes of buyers.

  • Education.

If your lender allows, you can take out such a loan to pay the college or university tuition. This option is more advantageous than standard student loans because it has a lower interest rate and a more extended repayment.

  • Debt Consolidation.

Paying off all your debts is an excellent financial decision. However, if you want to use a new loan for this purpose, it must have better terms than all the old ones. Borrowing such a large amount without collateral with a low APR will be difficult, but getting it secured against your home is much easier.

  • Weddings and Celebrations. 

For many couples, the wedding is the most important celebration of their lives, after which they want to spend some time on a wedding trip. But unfortunately, it takes an average of $50,000 to pay for these events, and that's a lot of money that's hard to get in the form of a personal loan.

  • Emergency expenses. 

Many unpleasant events can happen, some of which cause significant financial hardship. The amount of a home equity loan is large enough to cover all such expenses. But, unfortunately, you can't get a home equity loan fast - it can take anywhere from two weeks to a few months.

Can I Get a Home Equity Loan With Bad Credit?

Most lenders will only agree to work with lenders whose score is above 650. However, it is crucial to understand that there are plenty of offers on the market, and some financial institutions are willing to give you a loan if they see proof of your creditworthiness.

What, besides your FICO score, can show a lender that you will pay them back the money you borrowed on time? 

  • Your debt-to-income ratio. If it is below 30%, you have a good chance of getting your loan application approved. 
  • Your official income level. If you make $40,000 or more, you'll be a more reliable borrower in the eyes of lenders.
  • A co-signer. You may have someone in your family with good credit who could be your co-signer.

But remember that even if you get a loan with a low FICO score, you will have to pay a higher APR and most likely pay back the loan in a shorter time than usual.

Housing Loan

How To Apply for a Home Equity Loan

Before applying for a loan, you should prepare thoroughly. We suggest you review this outline of application for a home equity loan as a first step in preparation:

  • Choose a loan type. 

You need to figure out if you want to get the whole amount at once and pay it off in fixed monthly payments or if you want to be able to borrow a certain amount and pay it back using it as a credit card.

  • Gather all the necessary information. 

You will need to provide quite a few documents to get a loan. For example, you need to provide proof of your income, information about the amount and date you bought your home, the approximate value of your home, and insurance and lien information for all real estate owned.

In addition, it is essential to understand that all lenders have different requirements, so you should read about all the requirements on the financial institution's website where you want to get the loan.

  • Submit your application and submit all documents. 

It usually takes about three business days to review your application.

  • Get your application approved by the lender. 

This process includes initial credit approval, an appraisal of your home, and title approval.

Congratulations! After this point, you can sign the contract and pay off your loan according to the terms and conditions.

Advantages and Disadvantages Of Home Equity Loans

Compared to other types of loans, this option has many advantages: 

  • Lower interest rate. 
  • The ability to get a loan for more than ten years and pay it off in fixed payments. 
  • It's easier to get, even if you only have 620 FICO points.

But at the same time, it's essential to understand that this option won't work for everyone. There are several reasons for that:

  • You need to spend up to 3 months on average to get this kind of loan. 
  • You use your home as collateral for the loan and have a high risk of losing it if you don't pay back the funds on time. 
  • This large loan, like a mortgage, will require monthly repayment for many years.

It is best not to use this type of loan if you plan to move in the next few years. It's important to understand that you're borrowing money based on the value of your home in the market, and it could drop by the day you want to sell it.

In that case, the sale will not cover the loan amount, and you may have a more challenging time paying it off.

Home Equity Loan VS. Home Equity Line of Credit

Financial institutions offer three basic types of loans that use your home as collateral: mortgage, home equity loan, and home equity line of credit. Since everyone understands the first type of loan, let's discuss the difference between the last two.

A home equity loan is a large loan you get in one amount and pay back in fixed payments over the next few years. In essence, this option is similar to any other personal loan.

At the same time, a home equity line of credit is a specific limit you can use and pay back whenever you need money. It only works like a credit card because your home acts as collateral here.

A HELOC has the following features: 

  • The lender sets a certain amount, which becomes your credit limit. They also determine how long you can use it (usually 10 or 20 years). 
  • As with a credit card, you only have to pay interest on the amount of credit you use. However, some lenders also set a mandatory minimum monthly payment. 
  • Almost all HELOCs have variable interest rates. 
  • When your credit period ends, you must pay the total amount you owe, including interest. 
  • Many lenders can turn part or all of a HELOC into a regular fixed-rate loan if the borrower wishes.

Not sure which option to choose? HELOC is better suited for those who only need a little money at a moment's notice. With it, you'll only pay interest when you use credit funds and can borrow a small amount at any time without resorting to new loans.

The main disadvantage of this method is creating a bad financial habit of spending more than you earn. This huge credit limit can help you and ruin your life because of the higher APR.

If, however, you want to make a big purchase or prefer to plan your spending years, you are better suited to HELOAN. However, remember that you need at least some savings to pay your monthly payments on time, even if you have income problems.

FAQ

Can I use a home equity loan to buy another house?

Yes, you can use this amount for any legitimate purpose. For example, you can use this loan to make a down payment or buy a whole house if you have enough home’s equity.

Should I get a home equity loan or a HELOC?

A HELOC might be better suited only for those who need a large credit limit for future payments and can borrow money at any point in the next 10-20 years but don't need a large amount of money right now. However, such a large credit limit can lead to overdrafts.

What would the payment be on a $50,000 home equity loan?

The answer to this question depends on your interest rate, which the lender determines based on your credit rating, income level, and other indicators. For example, your loan is $50,000 for 240 months at 10% interest. That would make your monthly payment $541.6.

Is a home equity loan the same as a mortgage?

Yes, it is even called a second mortgage. The main difference between the two is that a home equity loan is used after you buy a house, and equity in your home is used as collateral.

Is it a good idea to take equity out of my house?

The answer to this question depends on your current situation. It is a good decision if you want to do this to pay off your debts with a better loan. However, taking out such a large loan to go on a trip can be a bad option that will lead you into a debt trap.

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