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Home Equity Loans in 2020: What to Consider

Home values are rising and more homeowners have the option to borrow some of their home equity. Lenders will check your home value and qualifications to determine how much you are eligible to borrow. Review your loan options with a home loan lender to see what is the best type of loan for you, a HELOC, or a straight home equity fixed rate loan. These are also known as second mortgages. Compare a home refinance with these options to see what is best for you.

There are a variety of reasons consumers choose to use these programs: Home repairs, remodeling projects, debt consolidation or to purchase a vacation or second home. A benefit is that the interest may be tax deductible depending on what you are using the money for. Check with your tax advisor to be sure.

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Reader-friendly guide to home equity loans

Need cash? If you're a homeowner, you're probably aware that home equity loans are a popular option for borrowing money. But you may be uncertain about what they involve and how to navigate the potential benefits and risks.

This guide is designed to help you quickly and easily find out what you need to know about home equity loans. Each section provides a brief overview of a key aspect of home equity loans, with links to further reading at key points.

Reader-friendly guide to home equity loans
02.
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Home equity loan interest rates tend to be lower than rates on other types of consumer debt.

Use our Comparison Table to find the best Home equity rates.

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Today's Home Equity Rates

Here is a quick history for home equity rates

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Home Equity Loans FAQ

So why do people opt for home equity loans when they need to borrow money? There are three key reasons:

  • Home equity loan rates are significantly lower than for unsecured debts, such as credit cards and personal loans.
  • There can be tax advantages, as interest on home equity loans is usually tax deductable.
  • Closing costs on home equity loans are relatively low and in some cases, nonexistent

A home equity loan is when you borrow money using the equity in your home as collateral. That is, you use the portion of your home that's paid for to back the loan.

Let's say you've got a $300,000 home and you still owe $100,000 on your mortgage. That means you've got $200,000 in home equity, and could borrow against a portion of that through a home equity loan.

Because a home equity loan is secured by the value of your home, you could lose the property to foreclosure, the same as if you fail to make the payments on your regular mortgage.

Home equity loans are available through most mortgage lenders. You can apply through the lender that gave you your primary mortgage, but it isn't required – in fact, shopping around for the best home equity loan rates and terms is strongly encouraged.

A regular home equity loan is useful if you need a lump sum of cash for a particular purpose, such as paying off other, high-interest debts or a one-shot home improvement such as replacing your roof. They're usually set up as fixed-rate home equity loans, so your monthly payments never change and you begin repaying it almost immediately. Loan terms usually run from 5-15 years.

HELOC or standard home equity loan2

A HELOC is good for an ongoing project where you'll have irregular expenses over time, such starting a business or a home improvement project where you'll be paying for supplies and the work in stages.

HELOCs are divided into a draw period, typically 5-10 years, when you can borrow against your line of credit, and a repayment period when you pay back whatever you've borrowed. They're usually set up as an adjustable-rate, interest-only loan during the draw period, then convert to a fixed-rate home equity loan when the repayment period begins.

HELOCs generally offer the best home equity loan rates, at least initially, because adjustable rates run lower than fixed ones do. However, that can change over time if market rates increase and your HELOC rate rises with them.

With many HELOCs, you can repay loan principle without penalty during the draw period, then borrow again as needed, so it can serve as a reserve pool of funds to use and repay as the situation warrants.

HELOCs tend to have lower up-front fees than standard home equity loans, and may charge no origination fee at all. However, you may have to pay an annual fee for each year the line of credit stays open, regardless of whether you have an outstanding balance or not.


More information: Home Equity Loan vs. HELOC: Know the Differences

The general rule is that home equity lenders will allow you to borrow against up to 80 percent of the assessed value of your property. That's for all loans combined, your primary mortgage and any second liens like a home equity loan. Some may go higher, some lower, depending on the lender and your borrower profile.

To determine what you can borrow, take the current value of your home and multiply by 80 percent (or what your lender will allow.)  Subtract from that what you still owe on your primary mortgage and any second liens you may already have. The remainder will be how much home equity you can 

borrow against.

how much can I borrow

For example, suppose your home is worth $250,000 and you still owe $150,000 on your mortgage and have no other second liens. Your calculations would be:

$250,000 x 80 percent =$200,000 maximum for all loans combined
$200,000 - $150,000 mortgage balance = $50,000 available home equity

So in this example, you could borrow up to $50,000.

Lenders will often allow you to go above the 80 percent figure, to 90 percent or more, but expect to pay a higher rate than you would on a home equity loan or HELOC where you  preserve at least 20 percent equity.

A home equity loan is a type of second mortgage. That is, it's a secondary lien secured by the equity in your home.

The mortgage used to buy the home is your primary lien, of first obligation. In the event of a default, your primary lien gets paid in full before any second mortgages are paid. In other words, the second mortgage is "subordinate" to the primary lien.

For this reason, there is more risk for lenders and interest rates on second mortgages are higher than those for primary mortgages as a result.

Other types of second mortgages include piggyback loans, which are used to cover part or all of a down payment, and reverse mortgages, a type of loan available to seniors.

In common use, "second mortgage" is often used to refer to a home equity loan, although the term covers other types of subordinate home loans as well.

Just like your primary mortgage, a home equity loan is secured by the value of your home. And just like with a primary mortgage, you could end up losing your home if you default on your home equity loan payments.

A home equity loan is a second lien, which means in the event of default the lender doesn't collect until after the holder of the primary mortgage/first lien is repaid in full. But don't assume this means you're protected as long as you remain current on your primary mortgage payments. If you default on your home equity loan, the second lien holder can foreclose on its own, pay off the primary mortgage with the proceeds from selling the home and use what's left to pay itself.

Because the sums involved are smaller and the costs of foreclosure are proportionately greater compared to the sums that can be recovered, lenders tend to be more reluctant to foreclose on a home equity loan than on a primary mortgage. But that may only buy you a little extra time or leverage to work out a repayment plan if you fall behind – don't assume it will protect you forever.

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