by Amy Lillard
To find the best home equity loan, you need patience, tenacity and a little bit of luck. More importantly, you need to remember what’s at stake.
With a home equity loan, a loan borrowed against the value of your home, you are using your home as collateral. Finding a home equity loan that is inappropriate due to costs, fees, or other considerations puts your home ownership at risk.
In this article we look at some of the key considerations when shopping for a home equity loan.
A home equity loan, often called a second mortgage, is a loan taken out with a fixed-interest rate. The loan is a one-time lump sum. The rate offered takes into account the APR plus points and other finance charges to process the loan.
In contrast, a home-equity line of credit, or HELOC, acts more like a credit card. Your lender extends a line of credit, and you can make continuing withdrawals within your limit. The interest for this loan is variable, based on APR without points or other charges.
Payments for these two different loans vary. With traditional home equity loans, payments are usually the same each month, including interest and principal. With a HELOC, payments will vary depending on the interest rate, how much credit you have used, and any options you have set forth with the lender.
There are significant benefits and risks with each type of home equity loan. A traditional home equity loan is a great choice for things like debt consolidation and single-purpose purchases (cars, medical expenses, college tuition, home improvements, and more). This loan is dependable, with low and fixed monthly payments and interest rates, compared to credit cards. In addition, interest may be tax-deductible, depending on specific circumstances.
HELOCs have some of the lowest interest rates and monthly payments of any consumer loans. Often used for debt consolidation, they are more flexible than traditional home equity loans, and application and documentation requirements are less demanding. Mortgage insurance is not required, reducing payments. Finally, interest may be tax-deductible, depending on specific circumstances.
The biggest fee with home equity loans is interest. But just as with first mortgages, the hidden or unrecognized fees are the real pain. To take out a home equity loan or HELOC, borrowers are assessed closing costs including attorney fees, title search, document preparation and insurance, property appraisals, application fees. Depending on the loan borrowers may also incur annual maintenance fees, or transaction fees for HELOCs. Finally, fees may also be assessed in case the balance of the loan is paid before the term is up.
Since the two types of home equity loans are highly variable when it comes to interest rates and fees, direct comparison is difficult. That’s why many financial experts advise thorough shopping. With the advent of online lenders, this is increasingly easier for borrowers.
Compare programs offered by your bank, by other banks, and even by credit unions. Look for interest rates, payment options, and all the fees that will be included. Compile your questions for face-to-face or phone consultations. Ultimately, the loan you choose is dependent on your personal needs and goals.
When conducting online comparisons especially, watch out for unscrupulous lenders. Most experts agree that trustworthy lenders will only lend up to approximately 80% of your equity. This is a safe and forward-looking practice. It’s important, then, to avoid spam email and online offers that promise such opportunities as 125% loans. With a loan like this, not only do you face the normal risk of defaulting and losing your home, but also owing an additional 25%!
Keep your search to reputable lenders, ask lots of questions, and keep the risks in mind. This will allow your home equity loan search to be fruitful.