Home equity loans, also called second mortgages, allow homeowners to borrow money by leveraging the amount of equity they’ve accumulated in their homes. The interest on these loans is tax-deductible up to $100,000. Home equity loans are divided into fixed-rate loans and home equity lines of credit (HELOCs).

Fixed-rate loans provide a single, lump payment to the borrower, which is repaid in fixed monthly payments over a set period of time. HELOCs are variable-rate loans that work a lot like a credit card. A maximum loan amount is determined, and the borrower can take out money against that credit line, as needed. HELOCs are divided into two periods—the draw period, in which you draw funds and only pay for the interest, and the repayment period, during which you repay both the principal and the interest. They have variable interest rates, based off an index rate with and additional markup that’s subject to your credit profile.

Either type of home equity loan can be an excellent way to obtain funds for home improvement, pay off and consolidate high-interest debt, or finance future earnings potential by paying for college or launching a small business. When choosing a lender carefully consider the terms, repayment plan, interest rates (some lenders have caps), and closing costs. If you take out a HELOC, another factor to think about is a conversion clause which essentially turns part of it into a fixed-rate loan.

The main issue with home equity loans is maintaining a cycle of debt, in which borrowers spend, borrow, and then continue to spend irresponsibly. Additionally, defaulting on a home equity loan could result in foreclosure, since they’re secured by your home. Finally, with HELOCs, watch out for initial interest “teaser” rates, prepayment penalties, and balloon payments at the end of the draw period.


Top 8 Companies

#1
Our Partner
9.7 / 10
  • Our #1 Choice
  • Rates as low as 4% APR
  • Make your home improvements that add value to your home
  • Get cash for a large purchase
  • Pay for college
  • Consolidate debt
  • When banks compete, you win!
#2
Our Partner
9.6 / 10
  • Enhance Your Life with a Cash-Out Refinance from Quicken Loans
  • A+ Rating with the BBB
  • Eliminate High-Interest Credit Card Debt
  • Pay for College Tuition or Buy a Vacation Home
  • Choose "Home Refinance" At Step 1 of QuickenLoans.com
#3
Our Partner
9.1 / 10
  • Get pre-qualified online
  • Flexible payment plans
  • Fixed or variable interest rate mortgages
  • Member of the Mortgage Banker Association
  • Approved Freddie Mac, Fannie Mae, and Ginnie Mae seller
#4
Our Partner
9.1 / 10
  • Realize the advantages of a Cash Out Refinance over a Home Equity Loan
  • Consolidate Debt, Pay for College or Renovate your Home
  • Low refinance mortgage rates
  • No points and no hidden fees
  • Over $10,000,000,000 Dollars in Loans Funded
  • A+ rating with the Better Business Bureau
#5
Our Partner
9.1 / 10
  • Enhance Your Life with a Cash-Out Refinance from Rocket Mortgage
  • Eliminate High-Interest Credit Card Debt
  • Pay for College Tuition or Buy a Vacation Home
  • Save time & avoid paperwork by sharing your finances online. 
#6
Our Partner
9.1 / 10
  • Home Equity Loans with Zero Origination Fees
  • Loan amounts from $35,000 to $150,000
  • Low fixed rates
  • 10, 12, 15, 20 or 30 year fixed terms
  • Zero cash due at closing
#7
Our Partner
9.1 / 10
  • Approved Equal Housing Lender
  • A+ BBB accredited
  • Get a personalized free online quote with the latest mortgage rates
  • Online financial resources center
  • Professional loan consultants
#8
Our Partner
8.9 / 10
  • Obtain multiple quotes
  • Easy-to-use
  • Benefit from CashOutQuotes' large lender network
  • Get matched with a lender suited to your financial situation
  • Use the equity in your home to get the cash you need
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How We Compare Home Equity Loans

Loans

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For the purpose of evaluating home equity loans, we're looking at three different types of products in this category. A straight home equity loan is fixed or variable rate and a one-time lump sum disbursement that you pay back the principal and interest monthly as you would any mortgage. A home equity line of credit (HELOC) is typically a variable rate credit line with a set maximum that you can draw funds from and pay back as needed. As you pay back the principal, the funds become available again. But should you choose, you have the option of not paying back the principal and only being charged the interest on what you've withdrawn during the disbursement period -- usually 10 years. After the disbursement period, the funds are no longer available and whatever balance you have left must be paid back, as with any other loan. A cash-out refinance is the same as a normal mortgage refinance where you replace your existing mortgage with another that has more favorable terms and/or rates. However, in this scenario you also take a portion of your home's equity as cash and add it to the balance of the refinanced mortgage. Cash out refinances are not a separate loan like home equity loans and HELOCs, as they effectively replace your current mortgage. 

When comparing a given financial institution's loan offerings, we look at many things. All loans have their associated fees, these include origination fee, appraisal fee, closing fee, application fee, maintenance fee, and whether or not a company will waive any of these. We also look at the minimum and maximum loan size, as well as the maximum term and minimum fixed and variable rates. When it comes to HELOCs, we assess any annual fees and the length of the draw period. As for cash out refinance, we take into consideration the set of loan terms as a whole. 

Waived Fees

Some lenders will waive certain closing costs and fees, so it's a good idea to explore as many options and special offers as you can given this.

HELOC Annual Fees

HELOCs may have an annual fee, a cancellation fee, and also a transaction fee every time you withdraw money.

Max HELOC Draw Period

How long will you have access to your credit line.

Cash-out Refinance Terms

Cash out refinances work in much the same way first mortgages do. Loan terms offered could be 15 year, 30 year, etc, with fixed and variable rates as well: 15 year fixed, 30 year fixed, 30 year variable, etc.


See 10 Best Home Equity Loans of 2018

The 4 Steps to Taking out a Home Equity Loan

If you own your house and need cash, either as a one-time payment or a credit line, a home equity loan might be the answer. You will first have to take an honest look at your ability to repay, determine your home’s equity, and ultimately decide on the best type of loan and lender.

1-Look at Your Finances

A home equity loan is a second mortgage, so in addition to your initial mortgage you are going to be making another monthly payment. In the case of a home equity line of credit (HELOC) you will only be paying the interest on what you borrow for the draw period, but will have to begin making payments when the loan becomes due, essentially deferring the payments to a later date.

Can you afford to do this? Make sure to have an accurate estimate on what your monthly home equity loan payment will be and see if it fits into your budget. If you are using a HELOC to make home improvements, will those improvements likely add value to your home? If your home does not appreciate in value, or if it in fact depreciates, you are going to owe for two loans, the initial mortgage and second mortgage. This could put you in a situation where you owe more than the property is worth.

Begin your search for a home equity loan or HELOC by taking a serious, honest, and sober look at your finances. If you are unsure you can afford the added monthly expense, keep in mind if you default you could lose your home.

2- Determine How Much You'll Receive

Lenders widely vary in terms of how much they’ll give you on your home’s equity. There are those out there who will give you up to 125% of your home’s value. These are generally predatory in nature and we recommend you avoid them. Monthly payments will be high, and if you default you may end up in the horrendous situation of still owing money to the lender even AFTER you’ve lost your home.

A conservative formula a lot of lenders use to determine the amount of a home equity loan is 75%-80% of your home’s value minus what you currently owe on the first mortgage. So if your house is appraised at $350,000, and you owe $250,000, you’re looking at a ballpark figure of $30,000 for the loan or HELOC.

After you’ve performed this calculation with your own set of numbers, ask yourself if the loan amount covers whatever you are planning on using it for.

3 – Decide on the Type of Home Equity Loan

There are two types of home equity loans, straight up home equity loans and home equity lines of credit (HELOCs). Deciding which one is right for you depends entirely on the purpose of the loan.

People use home equity loans for a variety of reasons. Chief among them are making home improvements and big, one time purchases. Others include consolidating credit card debt, paying off medical bills, and paying for college tuition. If you are looking to use the proceeds to install a new roof on your house, or to pay off a set amount on multiple credit cards, the lump sum payout of a traditional home equity loan is probably right for you.

If you need access to cash over an extended period of time, you might want to go with the HELOC. Let’s say you are making a series of improvements to your house, or you are looking at continuous medical bills for the foreseeable future due to some illness, it makes more sense to have a credit line. Additionally, if you are able to pay back some of what you have already withdrawn during the draw period, you could end up using more than the original amount. Inasmuch, some homeowners take out HELOCs with no purpose at all, just to have the additional financial security.

4 - Decide on a Lender

First of all, your home equity loan does not necessarily have to be through the same lender as your mortgage. Although it is good to at least see what your current lender might offer considering the fact you already have a relationship, banks, credit unions, and online brokers are all viable options to consider. Some key factors that should influence your decision include:

  • Rates – These days, a typical rate for a home equity loan is around 5.21%-5.22%, and 5.1%-5.37% for a HELOC. Keep in mind, home equity loans are generally fixed and HELOCs vary with the market. There are many different factors that will be influencing the rate you get including your location, credit, etc. In order to get an accurate quote a lender will have to take this personal information into account so know that the advertised, general rate may be nowhere near what you are going to get.
  • Terms – Home equity loans typically have terms from 5-15 years. Longer repayment terms mean lower monthly payments but usually higher interest rates. Getting a shorter term is the most financially responsible option just make sure the monthly payment can fit into your budget. The HELOC term will be dictated by how long you need access to the credit line. Again, you’ll be on the hook for interest during the draw period so the longer the term the longer interest has to accumulate.
  • Fees – A home equity loan has much the same fees associated with a first mortgage. Closing costs, attorney fees, mortgage insurance, application fee, appraisal fee, and penalties for missed payments could all be associated. Make sure to get an accurate picture of these fees from every lender you are considering.

If you are leaning toward a HELOC, it is also important to find out exactly how you will have access to the credit line. Will the lender issue you a credit or debit card? If the loan is for a specific project, are you comfortable with having the credit card in your wallet? Or will it be too easy to use it for other purchases other than its intended purpose. Maybe a checkbook would be a better option.

Our Top Ten List of the best home equity loan and HELOC lenders is a great place to start if you are considering going this route. You can explore a healthy mix of online marketplaces and individual lenders in order to cast as wide a net as possible.


Qualifications

30%

To qualify for a home equity loan you must first, obviously, own your home. After this there are generally three factors a bank or lender is going to take into account. First is your loan to value ratio (LTV). This is expressed as a percentage and is a representation of your home's current appraisal vs. how much you still owe on the first mortgage. For example, if your home is currently worth $300,000, and the balance on your mortgage is $250,000, you would have a LTV of 83.33%. Traditionally, for home equity loans and HELOCs, lenders are going to want an LTV of 80% or less to even consider you. As with any lending transaction, your credit score will also be considered. However, since the home is the main source of collateral, score requirements are usually not as high as with personal loans and other products of the sort. We'll depict the minimum credit score acceptable for each individual institution should the information be available. Lastly, lenders will also be looking for a healthy debt to income ratio, basically how much you make vs. how much you owe.

Loan Qualifications

Some other factors to take into consideration on the subject of qualification include:

  • Primary Residence: The home you’re taking the loan out against must be your primary residence.
  • Secondary Residence: The loan you’re taking the loan out against must be your primary residence or your secondary residence.
  • Property Appraisal: Some lenders want there to be a physical inspection of the house before lending money.
  • Proof of Employment: The person taking out the loan must prove steady employment and income.

See 10 Best Home Equity Loans of 2018

Requirements For a Home Equity Loan

How to qualify for a home equity loan

A home equity loan accesses your home’s growing value, and since they’re seen as less risky for lenders, you can get better rates and terms. Home equity loan requirements are the following: you must have accumulated equity in your home, have good or decent credit, demonstrate your ability to repay, and a low debt-to-income ratio.

1. Accumulate Home Equity

To determine how much equity you’ve built up in your home, subtract the amount remaining on your mortgage from the total value of the property. This is more commonly described as a loan-to-value ratio (LTV ratio)—or, the remaining balance on your loan compared to the value of your property.

Generally speaking, lenders require at least an 80% LTV ratio remaining after the home equity loan. This means they require you to own at least 20% of your home in order to qualify. Depending on your financial track record, lenders may allow you to borrow up to 85% of your home equity.

Keep in mind that these types of loans aren’t particularly useful for borrowing small amounts of money. Generally, lenders won’t offer loans under $10,000, and even that is quite low, as the amount is usually more in the $25,000-$100,000 range. If your needs can be met with a smaller amount, perhaps a home equity line of credit (HELOC) might be more convenient.

2. Raise your Credit Score

Good credit is a definite advantage when applying for a home equity loan, and can save you thousands of dollars over the life of your loan. Though these loans are secured by collateral, and lenders can afford to be more lenient in their requirements, a score of less than 620 can present considerable difficulties.

Most lenders use FICO scores from all three of the credit bureaus—Experian, TransUnion and Equifax— to determine your credit score. Each of the bureaus generates a credit report based on the information about you that they have on file. Even if you think your credit score seems accurate, it’s worth it to address any possible errors before initiating the loan application process. This is even more true if your score is low, in which case you might need to raise it before even attempting to apply.

3. Demonstrate ability to repay

Home equity lenders will look at your work history, income, and other monthly financial obligations to decide whether you can afford to repay the loan. Generally, this means a consistent employment history—preferably with the same employer or in the same industry for at least two years— verifiable income, and W-2 forms for the past two years.

If you are self-employed, or earn more than 25 percent of your income through commissions, lenders will also require two years of tax returns. Earning a sufficient income is only part of proving your ability to repay, however.

4. Lower your debt-to-income ratio

Your debt-to-income ratio is calculated by dividing your monthly debt payments by your monthly income. A good number is below 36 percent, but generally speaking, the highest a borrower can have is around 45 percent. If yours is high, try to cut down on unnecessary expenses, so your lender will see more earnings left over every month.

By and large, the monthly debt payments that are added up include your house payment (principal, interest, and taxes), homeowner’s insurance, direct liens if any, home association dues, credit card bills, IRS payments and even student loans that may not yet be in the process of repayment. If much of your income is dedicated to paying off existing debts, it follows that your ability to pay off new debt is substantially less than if you have a large percentage of earnings left over every month.

5. Verify if there are other costs and fees

The approval process for a home equity loan is almost always less strenuous than a mortgage approval process. Besides the factors listed above, lenders also require an appraisal of your home. There are some other closing costs for home equity loans, however, and it’s a good idea to comparison-shop different companies’ fees.

These additional costs and fees can include:

  • Attorney or title company representative fees
  • Title search
  • Document preparation costs
  • Application fee
  • Appraisal fee
  • Some also have a maintenance fee

Some companies also offer the option of paying points in order to lower the interest rate of your home equity loan. One point is equal to one percent of your loan amount, so for a $200,000 loan, a point would be $2,000. Comparing lenders and asking them to reduce or waive some of these fees can save you hundreds or thousands of dollars. A good place to start that search is our list of the top ten home equity lenders of the year.


See 10 Best Home Equity Loans of 2018

How to Qualify for a Home Equity Loan With Bad Credit

Home equity loans and HELOCs typically do not have the stringent credit requirements that other consumer loans and credit cards do. Since they use your home as collateral, the loan is seen as far less risky to the lender. However, this doesn’t mean that your FICO score is totally irrelevant.

How Hard Is It to Get a Home Equity Loan With Bad Credit?

A significant amount of equity is attractive because it essentially makes up for any debt you might have, or lack of credit history. If you have 20% or more equity in your home, in most cases you will be seen as a lower risk candidate, and this will make up for your poor credit situation.

While your choice will be more limited, there are plenty of lenders willing to extend home equity loans to those with bad credit for the reasons above. The list of institutions will still be longer than it would should you be trying for a personal loan or credit card. So getting approved for the home equity loan with bad credit isn’t so much the “hard” part as the terms you will have to accept.

What Will Be the Penalties for Bad Credit?

Right of the bat, you aren’t going to get the kind of interest rate someone with average or good credit is going to get. But, even though your rate may be high for a home equity loan or HELOC, it is still very likely lower than traditional revolving credit lines and loans. This is one of the reasons home equity loans are considerably popular.

Also, you might have to accept a lower amount than is usually paid out to those with good credit in order to minimize the risk to the bank. For home equity loans and HELOCs, lenders on average will allow you to borrow up to 80% of your equity minus taxes and fees. Bad credit might force you to accept less than this. The good news is, although you can use these funds for anything you choose, you might be able to use them to actually improve your credit.

How Can a Home Equity Loan Improve My Financial Situation?

The cash from a home equity loan can enable those with bad credit to do things they would not be able to if they had no equity in their house. For example, making the right home improvements could significantly increase their home’s market value. In this scenario you’d be removing the equity in your home in order to ultimately create more equity. This might improve your financial future but not do much in terms of your credit score.

In certain scenarios the home equity loan could actually positively impact your credit report and FICO score. Credit bureaus like to see a healthy mix of types of credit on your report. Adding an installment loan is actually a good thing if you’ve got a lot of revolving credit (credit cards). What’s more, making timely payments on this loan, and not missing any payments, can positively affect the “payment history” component of your report. At 35% this is the single most important factor determining your credit score.

Using the home equity loan to pay off credit cards and consolidate debt – and this isn’t recommended for every situation – can also improve your FICO score. After payment history the next biggest factor influencing your score is “credit utilization.” Carrying high balances on credit cards will negatively affect your credit. Using the funds from a home equity loan payout to bring your utilization ratios down to 0%-30%, which is the ideal percentage.

Private Mortgage Insurance

In a traditional first mortgage, private mortgage insurance is required if the borrowers down payment is less than 20%. This protects the lender should the homeowner default on the loan. It costs anywhere from .25% to 2% of the yearly loan balance and the deductible is paid by the borrower. PMI can allow those who don’t have a sufficient down payment to still buy the house they desire.

When it comes to home equity loans, PMI can be a negotiating tool for those with bad credit. While most borrowers are typically looking to avoid paying private mortgage insurance, those whose score is less than stellar can opt to pay it in order to get access to the loan sums available to good credit borrowers.

When it comes to applying for home equity loans with bad credit, having the most possible options is the key. That’s why going with our affiliate LendingTree is a good idea. You’ll be able to immediately get a ballpark idea of the kind of rates you can expect from various lenders in your area.


Reputation

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To assess a home equity loan lender's accreditations, we've drawn together three separate topics: site features and technology, size and financial strength, and memberships/licenses/regulatory actions. 

Total Originations (in millions)

While not specific to home equity loans since they represent all mortgage related activity, originations help determine the size and strength of the institution. This data represents 2013, the most current year provided by the Consumer Financial Protection Bureau. We'll also be looking at number of originations and average mortgage size.

Memberships & Accreditations

Some relevant memberships and accreditations for home equity loans, HELOCs, and cash out refinance include:

  • FHA Approved Lender: The lender can issue loans insured by the Federal Housing Administration. Since these loans are federally insured, the company can typically offer better rates than a non-insured competitor.
  • Federal Home Loan Bank Member: FHLBanks has a primary mission of providing member financial institutions with financial products and services that assist and enhance the financing of housing and community lending.

Nationwide Mortgage Regulatory Actions

Here we will list if the institution has received any regulatory or disciplinary actions. These are complied from the NMLS and can include adjudicated criminal, regulatory, civil judicial, or civil regulatory actions.


Consumer Experience

20%

To measure the consumer experience, we've looked at two main data sources, the total Consumer Financial Protection Bureau complaints, and the total CFPB complaints/originations. The Consumer Complaint Database collects complaints on a range of consumer financial products and services, and sends them to nearly 3,000 companies in order to give them a chance to respond. They don’t verify all the facts alleged in these complaints, but they do take steps to confirm a commercial relationship between the consumer and the company. It's important to keep in mind that larger lenders will naturally have more complaints. In light of this, looking at the ratio of complaints to number of originations is a better indicator of how many complaints they receive for each loan they handle. This number is computed by dividing the total complaints by the number of loan originations and then multiplying by 100. Data reflects all mortgage related complaints and is from the year 2013, the latest data available for both metrics.

Site Features & Technology

Companies that offer the following facilities rank highly with us, as borrowers increasingly are looking for a fully online transaction.

  • Home Equity Calculator: Allows you to calculate the equity in your home and how much you can borrow.
  • Online Application: Most sites will allow you to start the application process online.
  • Online Quotes: Can you view the rates or rate estimates online after you fill out your personal details? Or does the company just use the online submission form as a way of obtaining your phone number in order for an agent to call you?

See 10 Best Home Equity Loans of 2018

Best Options for Home Improvement Loans

If you’re like most homeowners, you are constantly thinking about all the ways you could improve or upgrade your home. Maybe you’d like to add a deck or renovate your kitchen? Maybe you’d like to remodel your bathroom or add another bedroom? Maybe you’d like to include some fencing, do some landscaping, or finally build the pool you’ve always dreamed of?

Whatever plans you may have for home improvements, two things are clear. It’s probably going to cost a lot more than you think. According to HomeAdvisor, an average kitchen upgrade can easily cost $20,000, and a bathroom remodel can set you back $9,000 or more.

Second, if you don’t have the cash in hand, you’re going to have to figure out how to pay for those improvements. Fortunately, there are many financing options available to you.

Home Improvements as an Investment

Renovating or remodeling is a great way to make your home more livable and as result, it might induce you to stay put for a longer period of time. However, according to Zillow, the average family lives in their home for just 7 years before moving. Since it’s likely that one day you’ll move, it’s important to know which improvements add value to your home, since it can translate into recouping more of your money when you sell.

  • Kitchens - Prospective homebuyers demand modern conveniences, appliances, and designs in the kitchen. As a result, kitchen improvements tend to add genuine value to your property, especially in older homes. Of all the major home improvements, updated kitchen features are probably the most valuable.
  • Bathrooms - Second only to kitchen upgrades are remodeled bathrooms. People expect bathrooms to be up-to-date with the latest designs, features, and fixtures. Again, a renovated bathroom usually results in a good return on your investment.
  • Outdoor improvements - First impressions are very important to homebuyers, so sprucing up your home’s exterior appearance is a smart investment. This might include upgraded siding, lighting, walkways and landscaping, particularly in the front yard. Even something as simple as replacing the front door can make a huge difference.
  • Roofs and windows - Roofs and windows are expensive to replace, but buyers expect these elements to be in excellent repair and condition. Unfortunately, while replacing them won't dramatically increase your home’s resale value, not replacing them could significantly decrease it.

Home Improvement Financing Options

The common culprit standing between most home improvement dreams and cold hard reality is money. Home improvements can be expensive, but the good news is that there are many ways to come up with the money needed for renovations.

Until recently, borrowing money for a home improvement meant going to the bank, seeing a loan officer, and hoping for the best. However, in today’s competitive financing market, you have lots more options—even if your credit history is less than perfect.

With so many lenders, loan options and terms, it also means that loan shopping can be confusing. However, you can avoid a lot of the confusion and find the right lender and loan, if you do a few things on the front end:

  • Know how much money you’re going to need and roughly how much you qualify for from the start.
  • Narrow your loan options down to the ones that match your needs and finances.
  • Concentrate on the lenders that are most likely to provide you with the type of loan you want.

Here are some options for homeowners to consider for financing their home improvements:

Cash

Obviously, this is the easiest and best way to pay for the cost of your home improvements. You won't have any future payments to make and won't infringe on the equity in your home. If money is an issue, perhaps it makes sense to only tackle one small project at a time, paying in cash as you go.

Refinance your mortgage

This is a great option for homeowners who would anyway benefit from refinancing. It’s possible you could get all the funds you need to finance your improvements, and obtain a lower mortgage interest rate in the process to boot.

Home equity line of credit

If you already have a desirable first mortgage, a home equity line of credit might be a good option. With a HELOC, the money is drawn out as you need it and you pay it back at your own pace, as long as you make minimum monthly payments. You don't pay interest until you use the money, the equity line is usually good for 10 years, and it’s also often renewable.

Home equity loan

With a home equity loan, you borrow a fixed amount and make fixed payments over a designated period of time. A 15-year term is typical, but with some lenders you can go as short as five years, or as long as 30 years.

Construction loan

Typically, a construction loan is used to build a house or make major renovations. It might be worth considering when you're building a major addition that will cost more than the equity you have in your home. Generally, a construction loan is a short-term loan, and when the home or renovation is complete, you roll it into a traditional mortgage loan

Borrow from your 401(k)

Most 401(k) programs allow you to borrow money from your account and pay it back over five years, usually via payroll deduction. However, if you leave your job, the balance will be due immediately.

Federal Housing Administration 203k loan

These loans are typically used to buy a house that requires a lot of repairs. They can also be used for refinancing, however, and the requirements are similar to those of other FHA loans. However, one downside is that you will have to carry mortgage insurance for the life of the loan.

FHA Title 1 loan

Borrowers can acquire these loans of up to $25,000 for home improvements, and they are insured by the federal government. FHA Title 1 loans are available from approved lenders at market interest rates, with terms of up to 20 years, and the homeowner is not required to have equity in their home.

Reverse mortgage

If you are 62 or older, you can get a reverse mortgage based on the amount of equity you have in your home. Reverse mortgages are more expensive than refinancing or home equity loans, but you aren't required to pay them back until the home is sold or you move.

Contractor financing

Some home improvement contractors have relationships with finance companies and might offer to arrange funding for your project. However, this is usually not a very good idea. You will almost always be better served by securing your own financing.

Undertaking home improvements can be a wise investment and they can also make your home more livable, but it's important to make sure you choose the best financing option for your personal situation.


What's important to know about Home Equity Loans?


What is a home equity loan?

A home equity loan is a form of loan which uses the equity of a home as collateral. Borrowers typically use these loans as a means of covering critical expenses. These can include tuition costs and out-of-pocket medical bills.

What is home equity?

Home equity is the portion of your home that you actually own. As you pay off your mortgage, the value of ownership you've built up in the house increases. For most people, their home equity is their largest source of net worth.

How does a home equity loan work?

A home equity loan uses your home equity as collateral for the loan. The lender will determine the maximum loan amount based on the value of your property, and you make monthly payments until the loan is paid off. The value of the property is established by an appraiser from the lending company.

Are home equity loans tax deductible?

The interest from a home equity loan may be tax-deductible. In order to qualify, the loan must be secured by your home and must have been obtained after Oct 13, 1987. The total deduction limit depends on what the loan money is used for. Loans used to buy, build, or improve your home have a $1,000,000 limit. Loans used for other purposes have a $100,000 limit.

How big of a home equity loan can I get?

Typically, lenders will allow you to borrow between 80%-90% of your home’s equity. So if your home is worth $300,000 and your mortgage balance is $150,000, you have $150,000 in home equity. Banks might offer you loans of $120,000 - $135,000. These are general figures not including taxes and associated fees.

What can you do with a home equity loan?

There are several uses for home equity loans. To name a few, they can be used for renovating a home, financing education, generating retirement income, paying off previous debt, or for investing.

What is a HELOC?

A HELOC is a Home Equity Line of Credit, which is when you borrow money using your home equity as collateral, or a guarantee for your loan. Your lender sets a borrowing limit, which is used as a line of credit: using the money, paying it off, and then borrowing again as needed.

How does a home equity line of credit work?

A home equity line of credit advances you a credit line using your home equity as collateral. You can then borrow up to the credit limit during a set time called the draw period. Monthly payments are usually just interest and the whole loan becomes due at the end of the draw period.

What is a cash-out refinance?

Cash out refinancing is the refinancing of a pre-existing home mortgage that allows the borrower to turn built-up home equity into cash. If the amount refinanced is greater than that of the original mortgage, the borrower will then be given the cash difference.

Should I get a home equity loan?

The pros and cons of home equity loans depend on what you intend to do with the money. With home improvements and major, necessary purchases the answer is almost always yes. If you intend to use the money as retirement income, for investments, or to pay credit card debt then the answer is more complicated.

Using a home equity loan to finance home improvements, like updating kitchens and bathrooms, or rebuilding a garage or basement, can increase the value of your home in the long run and therefore the overall equity. Paying off high interest credit cards or loans with home equity might seem a good idea on the surface, but it doesn’t get to the root of the problem of how this toxic debt is accumulated in the first place. Given the fact that debt is so easy to incur, you can effectively just be digging a bigger hole for yourself.