Home equity loans allow homeowners to borrow against the equity in their homes to fund home improvement projects or pay off or consolidate high-interest debt. Forbes Advisor compiled a list of home equity lenders that excel in various areas, including offering low fees, low loan costs, convenience and flexibility, so there’s something for people with different goals and financial needs.
Best Home Equity Loan Lenders of July 2024
- Navy Federal Credit Union. Best Home Equity Loan Lender for Military Members and Veterans
- Discover. Best Home Equity Loan Lender for Nationwide Availability
- Rocket Mortgage. Best Home Equity Loan Lender for Online Application Process
Summary: Best Home Equity Loan Lenders
Tips for Comparing Home Equity Loans
Shop around
Get the Loan Estimate
Compare APRs
Ask yourself what type of loan experience you want
The Complete Guide to Home Equity Loans
- What Is a Home Equity Loan?
- How Do Home Equity Loans Work?
- Closing Costs for Home Equity Loans
- Home Equity Loan Requirements
- Pros & Cons of Home Equity Loans
- How To Choose the Best Home Equity Loan Lender
- How To Get a Home Equity Loan
- Alternative Ways To Get Equity Out of Your Home
- Recap: Best Home Equity Loan Lenders Of 2024
- Methodology
- Frequently Asked Questions (FAQs)
What Is a Home Equity Loan?
A home equity loan is a type of financing that leverages the equity you have accumulated in your home. The lender decides how much you can borrow based on the amount of equity you have in your home. Most lenders won’t lend you the full amount of your equity, as this increases their risk.
If you’re approved, the lender will create a second mortgage and cut you a check for the full loan amount. You can then use the cash however you wish. This can be a good option if you know exactly how much you need to borrow.
Note that your home is used as collateral in a home equity loan. If you fail to make payments, you could lose your home to foreclosure.
How Do Home Equity Loans Work?
A home equity loan is a fixed-rate loan dispersed as a single lump sum. Terms range between five and 30 years, and you’ll repay the loan in equal installments with interest over time. Lenders typically require you to have 20% equity in your home and let you borrow up to 80% of the home’s appraised value, though some may go as high as 90%.
To give you an idea of how this works, let’s assume your house is valued at $500,000 and your mortgage balance is $100,000.
Your home equity lender allows you to borrow up to 80% of the home’s value, which in this case is $400,000 (80% of $500,000). Once you subtract your current mortgage balance of $100,000, you have a final value of $300,000. This is the maximum amount of equity you can borrow with this lender.
How Is Home Equity Calculated?
To calculate your home equity, subtract your current mortgage balance from your home’s appraisal value. For example:
$350,000 home value – $250,000 loan balance = $100,000 home equity
You can quickly estimate your borrowing potential with our home equity loan calculator.
Closing Costs for Home Equity Loans
Closing costs for a home equity loan can range from 2% to 5% of the loan amount. However, home equity lenders commonly waive these fees. While home equity loan closing costs can be similar to a home purchase loan or refinance, the total fee amount is generally lower since you’re financing a smaller balance. Typical expenses include an appraisal fee, an origination fee, and fees for document preparation, credit report inquiries and title searches.
Home Equity Loan Requirements
Eligibility requirements for a home equity loan vary from lender to lender. However, all lenders look for responsible, low-risk individuals.
These are generally the benchmarks that most lenders expect borrowers to meet:
- 620 credit score (some lenders may require a minimum of 680)
- Proof of stable and sustainable income from the past two years
- At least 80% equity in your property
- Debt-to-income (DTI) ratio no higher than 43%
- Excellent financial history
- Proof of homeowners insurance
How Long Does It Take To Get a Home Equity Loan?
You can potentially close on your home equity loan in a couple of weeks. However, this is often a best-case scenario. It’s not uncommon for this process to take up to two months.
Other factors, such as the timing of the home appraisal and underwriting process, are less in your control. Timelines for these processes can vary widely depending on the appraiser and lender.
Pros & Cons of Home Equity Loans
Pros of Home Equity Loans
- Tap into your home’s equity. A home equity loan allows you to access built-up equity in your property and turn it into cash.
- Use for almost any expense. You can use the funds from a home equity loan to cover almost anything you’d like, such as education expenses, renovations, medical bills and more.
- Fixed rates. Home equity loans usually come with fixed rates, which means your payments will stay the same throughout the life of the loan.
Cons of Home Equity Loans
- Acts as a second mortgage. If you take out a home equity loan and haven’t paid off your first mortgage yet, you’ll have to make payments on both loans at the same time.
- Can’t reborrow against the loan. If you end up needing more money than you expected, you’ll have to get another loan.
- Risk of foreclosure. If you can’t keep up with your home equity loan payments, you risk losing your house.
How To Choose the Best Home Equity Loan Lender
Consider these factors when surveying the best lenders for home equity loans:
- Interest rate. Seek out the lowest interest rate for your desired loan amount and repayment term by comparing quotes from several lenders. This will help reduce your loan’s overall cost.
- Fees. Choosing a lender with low or no closing costs can reduce your upfront expenses and minimize your total borrowing costs.
- Customer service. Consider working with a lender that offers you the best customer service, which includes answering any questions you might have comprehensively and in a timely manner.
How To Get a Home Equity Loan
If you want to take out a home equity loan, follow these steps:
- Check your credit. When you apply for a home equity loan, the lender will review your credit to determine if you qualify and what interest rate you’ll get—so it’s a good idea to check your credit beforehand to see where you stand. You’ll usually need a credit score of at least 620. While there are also lenders that accept lower scores than this, you will likely end up with a higher interest rate, and you might need to demonstrate a higher amount of income and greater amount of equity to get approved.
- Compare lenders and pick an option. Shop around and compare as many lenders as possible to find a loan that suits your needs. You might start by reaching out to your current lender, but be sure to consider other lenders, too, such as the ones we’ve listed above. Keep in mind, though, that fewer lenders offer home equity loans compared to HELOCs. Afterward, pick the option that works best for you.
- Fill out the application. Once you’ve chosen a lender, you’ll need to fill out a full application and provide any required documentation, such as tax returns or pay stubs.
- Get your funds. If you’re approved, the lender will have you sign for the loan so the funds can be released to you. You can generally expect the process from applying to closing on the loan to take anywhere from two weeks to two months.
Alternative Ways To Get Equity Out of Your Home
There are a few ways you can access the equity in your home without selling it.
Cash-Out Refinance
A cash-out refinance replaces your original mortgage with a new, larger one. The new loan pays off your old loan and covers your new closing costs. The remaining cash gets transferred to your bank account.
This option can make sense when you don’t like your existing mortgage—perhaps because the interest rate is too high or it’s an Federal Housing Administration (FHA) loan with permanent mortgage insurance premiums. If you can qualify for a cash-out refinance loan with a good rate, the closing costs might be worth it. If not, a home equity loan could be a better choice.
Home Co-Investing
Home co-investing, also called equity sharing or shared appreciation, allows you to sell a portion of your interest in your home to an investor and receive cash that you can use however you want. That investor could be an individual, but more likely, it’ll be a company that either invests itself or connects you with investors. Examples include Unison, Point, Hometap, HomePace, EquiFi and Unlock.
Since it’s not a loan, you don’t have to pay the money back. When you sell your home, the investor gets its money back, adjusted up or down by a share of the change in your home’s value. Depending on the investor, you’ll typically have up to 10 years, 30 years or a lifetime to exit the agreement. Exiting means selling your home, refinancing it or tapping your savings to repay the investor based on your home’s value at that time.
Home Equity Line of Credit (HELOC)
A home equity line of credit (HELOC) can be a good option for construction, home renovations or other expenses that you’ll pay over time. Similar to a credit card, a HELOC lets you borrow as much or as little of your available credit as you want; you don’t have to borrow a lump sum all at once. And HELOC closing costs can be minimal as long as you don’t close your line of credit within 36 months of opening it.
Many HELOCs also let you make interest-only payments during your first several years of borrowing, which is called the draw period. Once the draw period ends and the repayment period begins, which can be as long as 20 years, you’ll repay both the interest and principal. Unlike a home equity loan, the interest rate is variable, which means your monthly payments can change.
Recap: Best Home Equity Loan Lenders Of 2024
- Best Home Equity Loan Lender for Military Members and Veterans: Navy Federal Credit Union
- Best Home Equity Loan Lender for Nationwide Availability: Discover
- Best Home Equity Loan Lender for Online Application Process: Rocket Mortgage
Methodology
We graded the best home equity lenders based on features that have a meaningful impact on the cost of a home equity loan and a borrower’s experience, including interest rates, loan options, minimum credit score, accessibility, closing time and customer service.
We award bonus points if a lender waives all or a portion of the closing costs on its home equity loans, provides a specialty rate discount or offers customizable terms for its home equity loans.
Our scoring method is broken down as follows:
- Interest rate. 20%
- Accessibility. 20%
- Customer service experience. 20%
- Time to close. 20%
- Loan options. 10%
- Minimum credit score. 10%
- Bonus points. Up to 15 points
We chose to focus on these core elements to bring forward lenders that offer the most competitive rates while also providing a satisfactory customer experience accessible to borrowers of all financial backgrounds. We believe this scoring system best reflects consumers’ top priorities when comparison shopping for mortgage lenders.
To learn more about our rating and review methodology and editorial process, check out our guide on How Forbes Advisor Reviews Mortgage Lenders.
Frequently Asked Questions (FAQs)
How much can you borrow on a home equity loan?
Because your home is being used as collateral for the loan, lenders will not permit you to borrow more than the equity you have in your home.
In general, lenders will approve loaning up to a maximum of 80% to 85% of your combined loan-to-value (CLTV) ratio. CLTV is the measurement that takes into account what you still owe on your first mortgage and subtracts that amount from the appraised value of your home to determine the maximum amount of money you can borrow.
For example, if your home is appraised at $500,000 and you still owe $100,000 on your first mortgage, this means you have $400,000 in home equity. If your lender only allows for a maximum CLTV of 80% on its home equity loans, this means you could borrow no more than $320,000.
Is home equity loan interest tax deductible?
Possibly. You might be able to deduct the interest you pay on a home equity loan if you use the proceeds to “buy, build or substantially improve the home,” according to the IRS. It’s a good idea to check the specifics with a tax professional to see if this option is available to you.
Can you use a home equity loan for anything?
Yes, you can use the proceeds of a home equity loan to cover pretty much any expense. However, some uses might make more financial sense than others. For example, if you want to pay for higher education, it could be a better idea to look into targeted student loan products that don’t require using your home as collateral.
Can you refinance a home equity loan?
Yes, you can refinance a home equity loan, either by paying off the loan with a new home equity loan or HELOC or by rolling the balance into a larger first mortgage. You might opt to refinance if you can qualify for a lower interest rate, want to pay off the loan faster or can take advantage of other more favorable terms.
Keep in mind that just like when you first get a home equity loan, you’ll pay closing costs to refinance the loan—so be sure to take this into account when deciding if refinancing is the right move.
What is the three-day cancellation rule?
The three-day cancellation rule is a term for the right of rescission—a consumer protection provided by the federal Truth in Lending Act. Under this law, you have three business days to walk away from a home equity loan after you’ve signed for it for any reason and without penalty.
If you decide to cancel your loan, you must inform the lender in writing by mail or delivery before midnight on the third business day. For more information, visit the Federal Trade Commission website.