Today’s savvy homeowner knows what a home equity loan is; however, for the rest of us, here is a look into what we mean by using the equity in your home to get cash. A home equity loan allows the homeowner to take advantage of their most valuable asset.
At this point, you may be wondering what you’d do with the extra cash from a home equity loan. Now might be the time to tackling that list of home improvements, use the funds to clear up some debt, or take that dream vacation. The possibilities are endless.
Equity in your house simply means the percentage of the property you own.
To calculate your home’s equity, subtract the remaining balance on your mortgage from the property’s current market value. The equity in your home changes for two reasons, the loan is paid down or the property value increases.
Sometimes referred to as a second mortgage, there are basically two types of loans that allow you to take advantage of the equity you’ve built. A Home Equity Line of Credit (HELOC) gives you the option to take money out as you need it during a draw period. It’s like using a credit card. A Home Equity Loan provides a lump sum payment up to the limit based on your equity balance.
Second Mortgages Can Be Risky
The biggest disadvantage of a second mortgage is that the lender can take your home as compensation if you default on the loan. The terms of the loan may include paying additional fees and closing costs that can quickly add up. Also you should be leary of the popular introductory rates for HELOC loans. US Bank offers an introductory rate of 3.99% APR for the first year, then it goes up to 5.64% for the remainder of the loan.
How does that look in real dollars? Let’s suppose you took out a $100,000 loan for 15 years. The cost of the loan for the first 12 months would be $332 a month - once you switch to the higher rate it then costs you $470 a month for the remaining 14 years.
The HELOC would cost you a total of $82,944.00. The same amount for a Home Equity Loan at 4.99% APR will cost $74,849.00. A difference of just over $8000.00.
So it’s important to understand how the additional responsibility of a second house payment impacts your current lifestyle.
How Do The two Equity Loans Compare?
Both loan types are solid financing options, the variable is based on your home’s value.. Depending on your unique situation and reasons for the loan, it's important to understand the pros and cons of each option.
Home Equity Lines of Credit:
The funds from a HELOC are disbursed as you need them. The line of revolving credit allows you to withdraw money multiple times during a certain time frame referred to as the draw period. During the draw period, you can make interest-only payments.
- Low or no fees
- Get approved fast
- Only use what you need and when you need it
- Due to adjustable rates, your payment is not predictable
- Most lenders add annual fees
- Some lenders charge a prepayment or cancellation fee
Home Equity Loans:
A one-time payment is given to the borrower on closing day, who may use the money as they wish. The fixed rate loan is sometimes used to consolidate debt or pay contractors for home improvement projects.
- You’re free to choose how the funds are used
- The payments are predictable
- Annual fees are not required
- Rates are higher than HELOCs
- Buyers pay other fees and closing costs
- Your home is in jeopardy if you default
Top 5 Lenders with the Best Home Equity Loan Rates in 2019
The rising housing prices are expected to slow down in 2019. Higher rates and other factors impacted by the housing market are to blame. The search for the home equity loan for you begins with finding the best rates. We’ve done some of the hard work for you, and have compiled a list of the top five lenders based on their rates. Of course, if you need a little more guidance before approaching a lender, we’d suggest reaching out to a real estate agent.
Figure offers loans to borrowers with less than a perfect credit score. If your credit score is at 680 or above you could qualify for a loan from $15,000 to $100,000 with a fixed annual rate of 4.99%. The complete digital process also allows the consumer to borrow more as the loan is paid down. Funding is made available in as little as five business days.
U.S. Bank provides loan terms of up to 30 years, has no application fee, and you can apply from the comfort of your home. U.S. Bank currently offers loans a 5.49% APR on a 10-year term and 5.74% should you decide to go with a 15-year term. Their loans are available for up to $750,000.
Bank of America:
Bank of America offers a HELOC with a low introductory rate of 3.99% to well-qualified borrowers. After the first year the rate adjusts to a variable rate of 5.90%. However, U.S. Bank also offers incentives to make this loan more attractive. Such as, if you set up automatic payments you’ll get a .25% discount. Preferred Rewards program members enjoy an additional reduction of up to 0.375% off the interest rate.
PenFed Credit Union:
PenFed Credit Union gives you the option of taking up to 20 years or 240 months to pay off the loan, and the rate is fixed for the life of the loan. Borrowers with a loan-to-value ratio of 80% or less receive the best rates and terms. However, if you have an LTV of up to 90% you may still qualify. Rates are as low as 5.34% APR, and PenFed will also pay most or all of your closing costs
Chase also offers HELOCs at competitive rates that come with a 10 year draw period and a 20 year repayment period. The option of a fixed or variable rate gives you a little control over some of the loan terms. Current Chase customers could get up to 0.62% off the standard variable rate, and HELOC amounts are available from $50,000 to $500,000 for qualified borrowers.
Clever is Here to Help When You Need Us
We are confident that we’ve provided you with a great foundation to start your research regarding a second mortgage, however, we are master builders at providing additional insight. So reach out to us today, we’d be glad to address your questions and concerns.