If you own your home, there’s a good chance you currently have equity in the property. What does that mean? Essentially, it means that your house is worth more than you owe on it through your mortgage. With real estate prices rising across the country, it’s very likely your home has increased in value if it’s been at least a couple of years since you bought it.
Having equity in your home can be a helpful financial tool to have in your belt. You can tap into your home equity and take cash out to pay for other expenses. There are two ways to do this: either through a home equity line of credit or a home equity loan.
Each one performs a little bit differently so the best choice depends on your specific needs. We’ll briefly explain each type of home equity financing, then present five of the best online lenders.
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What is a home equity line of credit?
Home equity is the amount of the house that you own. If your initial home loan was for $200,000 and it’s now down to $180,000, then you have $20,000 in home equity built up.
Another way to determine your home equity?
If that same house is now assessed to be worth more than $200,000, then, of course, your equity will be the tax assessment minus the amount you still owe on the loan.
Home equity loans and home equity lines of credit (HELOCs) use the equity you’ve built up as collateral for a new loan. So if for some reason you stopped making payments on the new loan, the lender would then possess your equity.
Often times home equity loans are taken out to pay for big expenses, such as medical bills, college education, or, you guessed it, home repairs.
If you go this route, know that you can typically only borrow up to 85% of the equity you have in your house. So if you have $20,000 in equity, then the maximum loan you could take out would be $17,000.
You get the money all at once in a one-time installment, so the loan amount is a defined, fixed amount. This is different from a home equity line of credit (or HELOC), which acts much like a credit card in that it provides borrowers with a revolving line of credit.
Home equity loan terms vary depending on the lender and usually last between three and five years. In some extreme circumstances, however, loan terms can last as long as thirty years (yikes!).
What’s the difference between a HELOC and home equity loan?
HELOCs and home equity loans come with some very striking differences, so it’s important to make sure you understand those distinctions before you start applying.
With a HELOC, your borrowed funds are subject to an adjustable interest rate, whereas a home equity loan typically comes with a fixed rate. That makes your monthly payments more dependable.
Another key difference is the way in which you receive your loan funds. With a HELOC, you draw on your account as you need funds, but with a home equity loan, you get a lump sum all at once. Finally, a HELOC sometimes allows you to make interest-only payments for a certain period of time.
What are the best HELOCs and home equity loans?
There are a lot of home equity loans and HELOCs out there, and obviously, some are better than others for consumers. We’ve thinned the herd to what we consider to be the top five in the industry: LendingTree, Bank of America, US Bank, Figure.com, and PenFed.
Now find out why.
LendingTree is a matching service that pairs borrowers with multiple lenders. Fill out a single application with them, and you are instantly connected with multiple lenders all vying for your business.
That competition means you can instantly see who is going to give you the best service. You don’t have to scour the internet. That’s already been done. You don’t have to research the pros and cons of each loan and lender — that, too, has already been done.
Here’s what else we like about LendingTree.
Why it’s number one:
- Great APR quotes.
- Their customer service is like having an infinitely patient, well educated older brother or sister guiding you to make good decisions.
- Huge time saver. One application and you’re done.
- Everything is disclosed in plain view, and easy to understand.
- Their website is second to none.
What they can do to stay at the top:
- The phone calls can be a bit much from banks trying to get your business. A do not call option on your account would be great.
Bank of America
What they’re doing right:
- With over 5,000 branches (and counting) across the United States, finding a knowledgeable person to talk to is a breeze.
- Rather talk online? B of A’s online chat service is actually handled by real live people — not algorithms spitting out planned responses after noticing a few keywords.
- Low APR quotes. 2.99% for the first 12 months — and it’s only a three-year loan.
- That’s right: a three-year loan term. (Most are five!) While your monthly payment will be higher, you’ll save more money over time with a shorter loan term.
- They clearly outline and disclose all fees and terms of the loan. In fact, it’s one of the most transparent companies you’ll find anywhere.
Where they can improve:
- Despite their availability, customers across the board only give them an average rating on customer service.
- Their rate generator will not allow you to change the repayment term, which is unusual in the industry.
Where they’re nailing it:
- You can get approved in five minutes and get your home equity loan funded in just five days.
- Loans go as high as $100,000.
- There’s no appraisal fee.
- The minimum credit score is 680, which is in the “fair” range.
Where they could improve on:
- Currently, Figure.com home equity loans are available in just 33 states, but more areas are being added soon.
- Origination fee ranges between 0% and 3%. Always compare loan offers to make sure the overall cost of the loan is as low as possible.
Where they shine:
- Lower rates than Bank of America (fixed can be as low as 2.5%).
- Strong customer service reviews across the board, and the option to chat online.
- Just like Bank of America, they are very transparent about every fee and term that goes along with the loan. It’s right there right in the open.
- No early closing fees.
Where they need some elbow grease:
- Website is a little barren. If you’re new to the process, don’t expect US Bank to take the time to help you understand.
What’s working well:
- You can qualify for a HELOC with as little as 90% LTV.
- Credit lines can reach as high as $400,000 depending on the value of your property.
- Minimum HELOC amount is just $10,000 so you have flexibility in the amount of equity you need.
- Most closing costs are paid by PenFed.
Where there’s room for growth:
- You are responsible for the appraisal fee regardless of whether or not the loan closes.
- You’re required to reimburse PenFed for the closing costs they pay if you pay off the loan within two years.