Home equity loan (HEL) lenders give loans by letting borrowers tap into the equity in their homes. Equity is the difference between your home’s appraised value and what you currently owe on your mortgage.
If you need to pay for an unexpected emergency expense, pay off high-interest credit card debt, make home improvements, or you just need a little extra cash, using your home’s equity can be a good option. However, home equity loans don’t come without risks.
- What are home equity loans?
- Home equity loan lenders
- Alternatives to these loans
- Pros of home equity loans
- Cons of this financing option
- How to get a home equity loan
What are home equity loans?
Home equity loans are a type of second mortgage you pay back on top of your current mortgage. Generally, you can borrow up to 85% of a home’s equity. For instance, if your home’s market value is $400,000 and you still owe $200,000 on your existing mortgage, you have $200,000 in equity. In this case, you may be able to borrow up to $170,000.
Home equity lines of credit (HELOCs) and cash-out refinances are also financing options that tap into your home’s equity, and like a HEL, use your home as collateral. However, there are key differences.
Most home equity loan lenders charge a fixed interest rate and fixed payments for the term of your loan. Plus, your money is dispersed in one lump sum. HELOCs are revolving lines of credit (much like a credit card) that have variable interest rates and, possibly, variable monthly payments. You draw funds as needed, repay the money, and borrow again.
With a cash-out refinance, you convert your home equity into cash by replacing your existing mortgage with a new, larger loan and taking the difference in cash.
Each option can be tempting if you’re feeling strapped for cash, but keep in mind that your home is used as collateral. So, if you miss payments or default on your loan or line of credit, you risk losing your home to foreclosure.
Home equity loan lenders
Home equity loans get you the cash you need to fix your roof, pay for college, foot the bill for your wedding, or fund a large purchase by using the equity you’ve built up in your home. Most lenders prefer good-to-excellent credit to qualify for the best rates and terms on your HEL, along with sufficient equity in your home.
Here is our list of five of the top home equity loan lenders.
| 1. U.S. Bank | 2. Third Federal | 3. TD Bank | 4. Discover | 5. Flagstar | |
|---|---|---|---|---|---|
| Fees/closing costs | No fees or closing costs | Closing costs — but does not disclose amount | $99 origination fee | No closing costs, application fee, origination fee, or appraisal fee | No closing costs |
| Rates | 10-year term: 8.00% APR; 15-year term: 7.95% | 6.49% to 6.99% | 6.49% Fixed rate for a 120-month term, with a possible discount of 0.25 percentage points | Start at 7.49% APR | 7.79% APR (with a possible discount of 0.25 percentage points) |
| Credit score requirement | 620 | Not disclosed | Not disclosed | Not disclosed | Not disclosed |
| Terms | Up to 30 years | 5 to 30 years | 5 to 30 years | Up to 30 years | Up to 20 years |
| Amount you can borrow | 80% of the equity in your home | $10,000 to $200,000 | $10,000 to $200,000 | $10,000 to $200,000 | $10,000 to $1 million |
1. U.S. Bank
Best for: Anyone who wants to work with a traditional bank with high marks for a variety of loan products, affordability, and customer experience
U.S. Bank is the fifth-largest commercial bank in the U.S., with 2,000 branch locations in 26 states. It offers a wide variety of products, including home equity loans. Repayment terms are up to 30 years for a HEL and loan amounts range from $15,000 to $750,000 or more in some states. The minimum credit score to qualify for a HEL is 620, but to get the best rates, you’ll need a score of at least 730.
Pros
- Pays all closing costs
- Possibly helps you save even more money by setting up autopay or becoming a customer
- Offers several mortgage products, including HELOCs
- Ability to access your account online, making tracking your loan’s progress easy
Cons
- Have to call a banker to get personalized mortgage rates
- Mortgage rates published on website based on above-average or excellent credit score
- Does not disclose the average time for loan approval
2. Third Federal
Best for: Borrowers who want the option of either a fixed-rate or adjustable-rate home equity loan
Third Federal Savings and Loan ranks high in customer satisfaction. But if you crave the human touch, you’ll have to move to either Ohio or Florida to walk into a branch office. One perk to keep in mind if choosing Third Federal is that they offer a Lowest Rate Guarantee on similar HELs offered by any properly licensed lender. If you find a better rate, they’ll pay you $1,000.
Pros
- Publishes rates on its website, so you have an idea up front what you’ll pay
- Can get pre-approved for your HEL and lock in your rate for 60 days
- Can choose from either a fixed-rate or variable-rate loan.
Cons
- Not available in all 50 states
- Qualification requirements not published online, so you’ll have to go through the pre-approval process
- Has a minimum loan amount of $10,000 for a HEL, while the maximum loan amount is only $200,000
3. TD Bank
Best for: Customers who live along the East Coast
TD Bank provides mortgage products and outstanding customer service to borrowers who live in the Northeast, the Mid-Atlantic, the Carolinas, and Florida. Although eligibility information isn’t available online, you can use a rate-customizing online calculator to see the rate you might qualify for.
Pros
- Provides customized mortgage rates on its website by using its online calculator
- Will accept down payments as small as 3% without mortgage insurance
- Offers a variety of functions online, including personal loan progress updates
Cons
- Only available to East Coast customers
- Requires loans to be closed in a branch office.
- Charges a $99 origination fee on your HEL
- Has a tiered-rate system based on how much you borrow, the term of your loan, and your property type
4. Discover
Best for: Borrowers who want zero cash due at closing
Discover may be known for its credit cards, but it’s also ranked #1 in home equity loans, according to 2021 data on the FFIEC Home Mortgage Disclosure Act website. You can borrow $35,000 to $300,000 with repayment terms of up to 30 years, and complete the application process online. Also, Discover may let you borrow up to 90% of the equity in your home, which is more than with many other lenders.
Pros
- Has no closing costs, application fee, origination fee, or appraisal fee
- May qualify for loan amounts of $35,000 to $300,000
- Can use the loan amount and rate-and-term calculators to see personalized rates before you apply
Cons
- Only provides home equity loan products in certain states
- May charge a prepayment penalty for early repayment
- Has a closing process that takes an average of 6 to 8 weeks
5. Flagstar Bank
Best for: Borrowers with a limited credit history or low credit score
Flagstar Bank may not be a well-known name, but its products are a great option for first-time homebuyers or borrowers with less-than-stellar credit who live in states with Flagstar branches: California, Indiana, Michigan, Ohio, and Wisconsin.
You can apply online by entering some basic personal and financial information, and a loan advisor will contact you with specific rates and terms. You can also upload your documents and sign for your loan online with an electronic signature.
Pros
- Has no closing costs and no prepayment penalties
- Offers a discount of 0.25 percentage points by agreeing to automatic monthly payments from a Flagstar account
- Offers HELs from $10,000 to $1 million
Cons
- Only available in certain states and in certain cities with branch offices
- Has higher origination fees in comparison to other lenders
- Can take 3 to 5 days (or more) to get your payment.
Alternatives to home equity loans
If you’re unsure if a home equity loan is right for you, there are several other alternatives to consider.
Personal loan
Most personal loans come with fixed rates (like HELs). But it’s not uncommon to see higher interest rates because, typically, the loans are not secured by collateral. However, rates are generally lower than with many credit cards.
You can use a personal loan for almost any expense or to consolidate debt. Like a HEL, you receive your money in one lump sum, sometimes as soon as the next business day after loan approval.
Fees and other charges can be higher than with some other types of financial products, and you’ll likely need good-to-excellent credit to qualify for the best rates. Because personal loans come with fixed rates, your monthly payment is also fixed but may be more than paying the minimum monthly payment on a credit card.
Home equity line of credit
A home equity line of credit works much like a credit card, where you borrow up to a set credit limit, pay off the balance, and borrow again. Most lenders want to see a credit score of at least 680, but some lenders prefer a score of 720 or more. HELOCs can be used for almost any purpose and offer flexible, ongoing funding.
Like a HEL, your home is used as collateral to secure the line of credit, so if you miss payments or default on your loan, you risk losing your home to foreclosure. You can usually borrow up to 85% of your home’s value, and if you use the funds to substantially renovate your home, the interest (which is only charged on the outstanding balance) may be tax deductible. HELOC interest rates are often higher than standard mortgage rates.
Cash-out refinance
A cash-out refinance replaces your current mortgage loan with a new, larger loan. By borrowing more than you currently owe, you receive the difference in cash that can be used for almost anything you want. However, because you deplete the equity in your home, it’s best to use the funds to make home improvements or renovations that add equity back in.
You will likely need a higher credit score to get a better interest rate, but you may qualify with a score of 620. You’ll also need at least 20% equity in your home to be eligible. Closing costs can be high, and you do risk foreclosure if you default on your cash-out refinance.
Pros of home equity loans
There are several key benefits to home equity loans.
- Most HELs offer a fixed interest rate and fixed monthly payments for a fixed period.
- You can have a shorter loan term, depending on how much you borrow and how quickly you can comfortably pay it all back.
- You may qualify for lower interest rates than with many other forms of credit.
- You’ll get one large lump sum that can be used for almost any reason.
Cons of home equity loans
Along with the benefits, HELs also come with a few disadvantages.
- Because a HEL is dispersed in one lump sum, you might take out (and have to pay back) more than you actually need.
- You risk losing your home to foreclosure if you fall behind in your payments.
- You’ll pay closing costs and have two mortgage payments instead of just one.
How to get a home equity loan
If you’ve decided that a home equity loan is right for your situation, here are five steps to get one.
- Decide how much you need.
Typically, you can take up to 85% of the equity you’ve built in your home. However, if you don’t need that much, it’s better to take less. Why? You’ll now have to make two mortgage payments. So, by taking less of your home’s equity, you’re able to cover both payments and your other monthly expenses.
- Check your credit score.
Your credit score, along with your debt-to-income (DTI) ratio, income, and other factors, play a big part in qualifying for the best interest rates and terms on your loan. It’s a good idea to check your credit score and, if it needs work, take steps to improve it before applying.
- Compare lenders and rates.
It pays to compare lenders. Getting prequalified typically won’t hurt your credit score, so shopping around can ensure you get the very best rates possible based on the health of your credit.
- Compile documents and complete your application.
With many lenders, it’s possible to complete your application and upload your personal and financial information online. Some lenders require you to call or visit a nearby branch office. When you fill out an application and apply for a HEL, your credit may take a slight dip as lenders usually do a hard pull of your credit report.
- Wait for approval.
Waiting is never easy. Some lenders can let you know how much you qualify for with rates and terms as early as the next day. However, other lenders take anywhere from a few days to a few weeks to complete your loan. After they’ve completed the review and you’re approved, you’ll receive the funds you borrowed.