Rate Trends

Home Equity Loans

What is a Home Equity Loan?

A Home Equity Loan, also commonly referred to as a Second Mortgage, is a fixed-amount, closed-end loan based on your home's available equity (the difference between how much you owe on the mortgage and how much your home is worth). Your home is used as the collateral for the loan, which is disbursed in a single, lump-sum payment. Amounts can range from a few thousand up to a few hundred thousand dollars and typically a Home Equity Loan is used for larger purchases, such as home remodeling or landscaping, medical or education costs, or debt consolidation.

How to Read the Average Rate Chart

Like any loan or stock purchase, you want to buy when the rates or price are at their lowest, because that's when money is "cheapest." Of course, you never know exactly when the rates will bottom out and start going back up—or vice versa—but with Credit Karma's average rate chart you can see where rates have been to get a sense of where they might be going.

So if the chart shows that rates are on a downward trend and have been for a while, now might be a good time to start seriously talking about securing a Home Equity Loan. Even if rates have been going down and have taken a slight turn back up it's probably still a good time since you know the rates are close to as low as they've been recently.

Note: If you do decide that now's a good time to open a Home Equity Loan, it's important to shop around since different lenders will offer you different rates and include different fees. You can check the daily Home Equity Loan comparison of hundreds of lenders here.

Home Equity Loan Features

Unlike a Home Equity Line of Credit (HELOC), a Home Equity Loan is a set, lump-sum amount, typically with a fixed rate and fixed payments for the life of the loan. You cannot add additional money to the same loan once it has closed.
The maximum amount of money you are permitted to borrow and your interest rate depend on several factors, including the lender, loan to value, the appraised value of your collateral (home), credit score, and others.
It is common to be able to borrow up to 100% of the appraised value of your home, less any liens (your mortgage or any other home equity-based loans or lines of credit), although there are lenders that will go above 100%. This varies from state to state.
Interest rates generally depend on long term market rates such as the 10-year Treasury Bill. Changes in the Federal Funds Rate generally have little or no impact on closed end Home Equity Loan rates. Also, higher loan amounts tend to carry higher interest rates.
Most Home Equity Loans can be amortized for period of time, usually up to 15 years.
The interest on a Home Equity Loan is generally tax-deductible, same as your mortgage. This is something, however, that you'll have to consult a qualified tax advisor about, since conditions vary from lender to lender and state to state.

Home Equity Loan Benefits

From the list of Home Equity Loans features you can tell that this type of loan is a great source of financing with lower-than-average rates because the loan is collateralized by your home. But sometimes it helps to put the financial product into context so that you can see how it might benefit your life.

Say you're remodeling your kitchen and bathrooms. You have the contractor estimate and know exactly how much the whole project will cost. Getting a Home Equity Loan for that amount will cover all your expenses with very little up-front money out of your pocket.

Or perhaps your child just got into a top-notch college and student loans/financial aid aren't going to cover everything. Find out how much you expect to spend on tuition, room, and board over the next four (or possibly five or six...) years and your Home Equity Loan can help you pay for everything while keeping your monthly expenses reasonable. The tax advantages may also serve to offer a great deal of savings.

Home Equity Loan Considerations

Of course, every loan product is only good for certain people in certain situations and at certain times. Three major things every home owner should remember when considering a Home Equity Loan are:

The penalty for defaulting on a Home Equity Loan can be quite substantial, given the fact that your home is being used as collateral. Failure to repay the loan or meet loan requirements may result in foreclosure.
A Home Equity Loan will create a lien against your house, thereby reducing actual home equity.
Some home equity loans offer reduced amortization whereby at the end of the term, a balloon payment is due. If you are not prepared to make such a large payment at the end of the loan you might default on the loan. To combat this problem, you can usually pay above the minimum monthly payment or refinance the loan at the end of the terms.

The Federal Truth in Lending Act requires lenders to disclose the important terms and costs of their home equity plans, including the APR, miscellaneous charges, payment terms, and information about any variable-rate feature (if applicable). So make sure you carefully read all of the information regarding each of the Home Equity Loans you are considering before you take the plunge.

Where to go for a Home Equity Loan

Your bank or credit union may or may not be able to offer you the best rate and terms, even if you have your first mortgage with them, so it's important to compare several options. Click here to view Credit Karma's extensive list of Home Equity Loan lenders.

Comment on Article