The rapid rise in housing prices we’ve experienced the last few years is expected to slow down in 2019, as higher interest rates and other factors temper the housing market. While this is good news for future home buyers, it’s can complicate things for current homeowners looking to add value to their property. If you’re considering taking out a home equity loan or home equity line of credit, it’s never been more important to do your homework.
When you start searching, you’ll need to have some basic information ready, like your home’s estimated value, its purchase price, remaining mortgage, the amount you want to borrow, and your credit score.
Finding the best home equity loan rates is like shopping for any other product — the more you know, the better your chances of getting a good deal. Money360’s guide to the best home equity loan rates of 2019 can help you on both fronts.
Best Home Equity Lenders for 2019
- Figure Home Equity Line
- U.S. Bank
- Bank of America
- PenFed Credit Union
#1: Figure Home Equity Line (check current rates)
Figure Home Equity Line offers a unique loan option that is mostly like a HELOC, a little like a home equity loan, and completely online. Loans are available for consumers with a 600+ credit score in amounts from $15,000 to $150,000 with fixed annual percentage rates starting at 4.99%, and borrowers have the option to take additional draws on their loan once they’ve paid it down. Figure Home Equity Line has flexible terms, too, ranging from five to 30 years.
The loan application is 100% digital—even the notary visit— and you’ll know in five minutes if you’re approved. Funding occurs in as little as five days. There’s no application fee, closing costs, or annual fee, just a single origination fee.
- Competitive interest rates
- Easy and simple online application process.
- First all-digital loan experience with funding in as little as 5 days
- No hidden costs, just a one-time origination fee.
Disclosure: Origination fees range from 0-4.99% of your initial draw depending on your credit score and the state in which your property is located. You may also be responsible for paying recording fees, which vary by county.
#2: U.S. Bank (check current rates)
U.S. Bank offers high-quality home equity loans with affordable fixed interest rates and fixed monthly payments. Currently, U.S. Bank offers home equity loans with 5.49% APR if you choose a 10-year term and 5.74% APR if you choose a 15-year term. You can also apply for a home equity loan with a term of up to 30 years.
Home equity loans from U.S. Bank are available in amounts up to $750,000, and you can apply easily from the comfort of your home. There are also no application fees or closing costs for a U.S. Bank home equity loan, and the origination fee is optional.
- Competitive interest rates
- Solid customer service scores
- Borrow for up to 30 years
- No application fee or closing costs
#3: Bank of America (check current rates)
Bank of America offers a home equity line of credit, or HELOC, with introductory rates as low as 3.99% for qualified borrowers. After the introductory period, the rate could reset to a variable APR as low as 5.90% for the duration of the loan (although Bankrate economist Greg McBride expects interest rates to rise more before flattening out). One big benefit of working with Bank of America is that their HELOCs come with no application fee, no closing costs, and no annual fee.
If you’re eager to save money on your loan over the long haul, it’s also important to note that Bank of America offers a 0.25% discount if you set up automatic monthly payments. Bank of America customers who belong to their Preferred Rewards® program can also qualify for an interest rate reduction of up to 0.375%.
- Competitive interest rates
- Discounts available
- Transparent fees
- Online chat and robust mobile platform
#4: PenFed Credit Union (check current rates)
PenFed Credit Union offers home equity loans with a wide range of loan terms in amounts up to $400,000. You can repay your home equity loan for up to 240 months (20 years) in some circumstances, and you’ll get fixed monthly payments for the life of your loan.
The best home equity loan rates and loan terms go to those with loan-to-value ratios of 80% or less, although home equity loans may be available to consumers with LTVs of up to 90%. While it’s a credit union, you can apply for a home equity loan from PenFed from the comfort of your home, and the lender may even cover some or all of your closing costs if you qualify for their Closing Cost credit.
- Competitive interest rates as low as 5.34% APR
- PenFed may pay all or most of your closing costs
- Borrow up to $400,000
- Loan repayment timelines up to 240 months
#5: Chase (check current rates)
Chase is another bank that offers home equity lines of credit, or HELOCs to consumers who want to borrow against their home’s value. Chase HELOCs come with a 10-year draw period followed by a 20-year repayment period, and consumers can choose between a variable rate or a fixed rate. Chase HELOCs also have low fees, including a $50 origination fee and $50 annual fee that must be paid each year.
If you’re a Chase customer already, you could get up to 0.62% off the standard variable rate with qualified accounts. HELOCs are available in amounts between $50,000 and $500,000 for consumers who qualify.
- Competitive rates
- Loan amounts up to $500,000
- Chase customers may qualify for a reduced interest rate
- Low fees
Home Equity Loan Rates: Snapshot
|Loan Options||Loan Amounts||APR|
|Figure.com||Home equity line of credit, or HELOC||Up to $100,000||Starting at 4.99%|
|U.S. Bank||Home equity loan||Up to $750,000||Starting at 5.94%|
|Bank of America||Home equity line of credit, or HELOC||Varies||Introductory offers starting at 3.99% variable|
|PenFed Credit Union||Home equity loan||Up to $400,000||Starting at 5.34%|
|Chase||Home equity line of credit, or HELOC||Up to $500,000||Starting at 5.75%|
What Is a Home Equity Loan?
Home equity loans are a type of loan that involves borrowing against your home and using your property as collateral to secure the loan. It also involves the equity you’ve built up in your home, a measure of its current market value minus what you still owe on your mortgage. The rate simply means the interest rate charged by the lender.
The process for a home equity loan is similar in some ways to taking out a mortgage, but a lot more streamlined and simplified. Once the application has been approved, the borrower receives a lump sum from the lender upfront, with an agreement to pay back the borrowed money over a fixed term at a fixed interest rate.
Homeowners typically use this kind of loan to pay for large-scale renovation or improvement projects, although they can be used for other purposes, including debt consolidation.
Pros and Cons of Home Equity Loans
- Pro: Because borrowers use their homes as collateral, they can count on getting better terms than they would with unsecured personal loans or similar options.
- Con: On the other hand, since you’re putting up your home as collateral, you could risk losing it if you default on the loan.
- Pro: Borrowers get their money in a lump sum.
- Con: Remember the closing costs you paid on your mortgage? The closing costs associated with a home equity loan are typically similar.
When to Consider a Home Equity Loan
To summarize, consider a fixed-rate home equity loan if:
- You have enough home equity to borrow against.
- You need a one-time loan for a single project.
- You want the security of a fixed interest rate, even if that means the rate might be a bit higher.
- You want to be able to budget for the same payment each month.
- You have a major home improvement that will boost the value of your house.
What Is a Home Equity Line of Credit, or HELOC?
A HELOC, the more flexible sibling of home equity loans, can also be an option to fund your home improvement. HELOCs work kind of like credit cards, in that you can use the funds from your line of credit repeatedly as long as you stay under your borrowing limit. This makes it a compelling choice if you’re embarking on a long-term home renovation and you aren’t sure exactly how much money you’ll need or when you’ll need it — contrast this with personal home improvement loans and home equity loans that pay out a lump sum. If you don’t manage that money wisely, you’re out of luck.
The biggest drawback to a HELOC is the variable APR. Because your interest rate isn’t locked in, it could rise substantially, and that can make it tricky to budget for repayment. And while most HELOCs allow you to pay only interest while you’re drawing funds from the line (this is called a “draw period,” commonly 10 years), that means you’ll be hit with much higher payments down the road. If you don’t plan for it, you can get into financial trouble very quickly. And again, like a home equity loan, getting a HELOC assumes you have equity available in the first place.
Some banks and lenders may offer a hybrid of an equity loan and a home equity line of credit that has fixed-rate interest. With this option, you can lock in part of the balance you owe at a fixed rate. However, you may have to pay a “rate-lock” fee and borrow a minimum amount before you qualify.
Pros and Cons of HELOCs
- Pro: The repayment structure makes a home equity line of credit more flexible than an equity loan.
- Con: As with any equity loan, putting up your home as collateral involves some risk.
- Pro: You may have fewer up-front costs than you would with an equity loan.
- Con: Paying adjustable interest rates instead of a fixed rate can be problematic, especially if interest rates go up. A lapse in discipline coupled with rising APR on your line of credit could prove expensive.
When to Consider a HELOC
To summarize, consider a HELOC if:
- You have enough home equity to borrow against.
- You need ongoing access to funds over a longer period of time.
- You are willing to accept the risk that your low interest rate may rise.
- You can budget for a steep rise in payments if you pay back only interest during your HELOC’s initial draw period.
Best Ways to Use a Home Equity Loan or HELOC
Both home equity loans and HELOCs allow you to borrow against the equity in your home. However, how you use the funds you receive is really up to you. While many people use home equity loan products to remodel their homes or complete a major renovation project, other people tap into their home equity in order to make important repairs to their property such as adding a new roof or fixing a leaky basement.
Still, there are plenty of other ways to use home equity to your advantage. Here are some possibilities to consider:
- Use a home equity line of credit (HELOC) or home equity loan to consolidate high-interest debt at a lower interest rate.
- Tap into your home equity to finance college tuition for yourself or a dependent.
- Use your home equity to pay down overdue medical bills that are weighing you down.
- You can even use home equity to purchase another property in some cases.
Home Equity Loans vs. HELOCs
Which one should you get? Before deciding, make certain that you understand the differences between an equity loan and a home equity line of credit, as well as the various pros and cons.
A home equity loan is typically the better choice if you want to pay for a large, one-time expense that you’ll pay for upfront, such as a major home renovation, a car, a wedding, or a dream vacation.
A home equity line of credit would make more sense if you need to borrow a smaller amount over a longer period of time. For example, you might choose a HELOC to finance an ongoing series of modest home improvement projects.
How Much Can You Borrow?
With most home equity lenders, you could borrow up to 80% of the equity you’ve built up in your home. The maximum amount, also called the loan ceiling, is typically 85% of your equity.
Some of the factors that affect the terms of the loan or line of credit include:
- Your home’s market value
- Your credit history
- Your income
You can easily get a general idea of your home’s equity and the amount you could potentially borrow. Start with your home’s estimated market value and then follow the remaining steps in our Home Equity Loan Worksheet. The results provide a rough estimate of how much you could expect to borrow, your loan ceiling.
Can I Use a Home Equity Loan to Buy a Second Home?
Sure. In fact, if you’re looking into buying a second home, using a home equity loan could make the process easier and less expensive than going the second mortgage route. But a lot would depend on your credit score and the value of your primary residence.
Since your primary home would serve as collateral through a home equity loan, you could benefit by bypassing a lot of the closing costs and insurance fees that mortgages bring. Lenders know you’re less likely to utilize the second home as much as the primary one, so your income and credit score heavily influence your interest rate.
If your credit and income are strong, interest rates tend to be lower on your second home through a home equity loan. Otherwise, interest rates could be higher to ensure that lenders are covered if the borrower hits a bump in the road — in which case the borrower is much more likely to cease payments on the second home than the first.
If you own your home outright and are interested in using a home equity loan as a down payment for the second, you could have some more flexible options as well.
Can I Sell My Home if I’m Still Repaying My Home Equity Loan?
The short answer is yes, but you might receive far less than your asking price.
Let’s say you’re currently repaying a home equity loan or HELOC and you want to sell your home. The good news is that you won’t have to repay the loan before putting your home up for sale.
The bad news is the lender will deduct the remainder of your loan from the ultimate sale. This won’t affect the sale price of the home, just what you receive. And if you haven’t built up your equity (and still owe a considerable amount on your mortgage), you may receive even less.
You should take out a home equity loan/HELOC only if you intend to remain in your home for at least a year.
What Does it Mean to Refinance?
Cash-out refinancing acts much like a home equity loan/HELOC by allowing you to leverage the equity in your home. Rate/term refinancing will only affect the terms of your primary mortgage.
Home equity loans and HELOCS act as secondary mortgages. You’ve borrowed against the equity you’ve built up. The primary mortgage still must be paid off after the home equity loan or HELOC.
Refinancing directly affects your primary mortgage. Rate/term refinances will allow you to alter the rates and terms of your existing mortgage. Cash-out refinances allow you to take out a higher mortgage and receive the difference in cash.
Know Your Credit Score
Don’t underestimate the influence of your credit score on your ability to secure the best home equity loan rate.
What kind of credit score do you need for the best rate on a loan or home equity line of credit? It may depend on the lender, your level of home equity, and other factors. In general, though, you’ll need a credit score above 700 to get a lower rate.
The best rates on equity loans typically go to applicants with higher credit scores. However, you don’t necessarily need a perfect credit score to qualify for the loan itself. Your lender may be willing to work with you even if your credit has a few minor dings or blemishes.
In some cases, homeowners with bad credit may be able to get a loan or line of credit. However, they almost certainly won’t get the best interest rate — far from it.
Fortunately, you do have the power to raise your credit score. With some fiscal discipline and the right strategic steps, you could improve your credit score and, by extension, your chances of qualifying for the best home equity loan rate.
Can I Get a Home Equity Loan or HELOC with Bad Credit?
While some home equity lenders require minimum credit scores, not all do. It may be possible for some borrowers to get a home equity loan or HELOC with bad credit, but they probably will not get favorable interest rates.
Typically, lenders like borrowers to have a credit score that’s anywhere from 620 to 650 at a minimum. When it comes to home equity loans and HELOCs, loan-to-value ratio can be just as important.
What Is Loan-to-Value Ratio?
A home’s loan-to-value ratio (LTV) measures the market value of the home against the amount currently remaining on the loan. In other words, the more of the loan or mortgage you’ve paid off, the lower your LTV will be.
Let’s say you’ve paid down $40,000 on a $100,000 mortgage. With $60,000 still remaining on the mortgage, you’ll have a 60% LTV. (This also means you have 40% equity in your home.)
Lenders like to see homeowners with a minimum LTV of 80%. If you have bad credit, but you’ve still got a minimum 20% equity in your home, some lenders may still consider you for a home equity loan/HELOC.
Alternatives to Home Equity Loans
It’s unlikely that home equity lenders will grant the best rates to borrowers with bad credit. And home equity loans/HELOC amounts are typically on the higher end — minimum loans usually start around $10,000.
Not to mention that these loans are also secured by your property. You risk losing your home if you’re unable to repay.
If you have bad credit, consider one of the alternatives to equity loans. If you’re struggling to pay back credit card debt, consider a balance transfer card. If you need to consolidate multiple debts, consider taking out a consolidation loan or a personal loan.
Is My Home Equity Loan Interest Still Tax Deductible?
While the tax law changes that passed in late 2017 initially left experts believing consumers could no longer deduct interest from home equity loan products on their taxes, we now know this is not the case. According to the Internal Revenue Service (IRS), homeowners can still deduct home equity interest — if they used the funds to build a home or substantially improve it.
Here is the exact wording used on the IRS website:
“The Tax Cuts and Jobs Act of 2017, enacted Dec. 22, suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.”
However, that means you cannot deduct interest on a home equity loan that you used to pay for a child’s college tuition, for example.
What Should I Do if I Already Have a Home Equity Loan or HELOC?
If you have a home equity loan, your best option is to pay down as much of the principal as possible. Reducing the principal will reduce the amount of interest you pay – even if the percentage remains the same.
If you have a HELOC already, your best option will vary. If your HELOC includes an interest-only draw period, then the most you can do is make monthly payments in full and on time. Once the repayment period comes, you’ll be able start paying down your principal.
If your HELOC includes a principal and interest draw period, or if you’re currently in the repayment period, treat it as you would a home equity loan. Attack the principal as much as possible, in order to reduce the amount of interest you owe.
The Current Outlook
There is plenty of good news for homeowners when it comes to interest rates and today’s lending environment. For example:
- As of early 2019, you could easily find a quote for a home equity loan rate somewhere around 5%. A typical rate for a home equity line of credit could be in the 4% range or even lower, although bear in mind that the variable APR would most likely rise over time.
- The real estate website Zillow.com estimated that U.S. home values had risen 7.7% in 2018 and predicted an increase of 6.4% in 2019.
In short, despite some recent increases, interest rates are still pretty favorable and rising home values could increase your borrowing power. That’s the good news.
The bad news involves last year’s tax reform bill, which, by doubling the standard deduction and capping deductions of state and local taxes, reduced some of the tax incentives of home ownership. Moody’s Analytics expects that, by summer 2019, home prices will be 4% lower than where they would have been before the tax reform bill passed.
Is now a good time to take out a home equity loan or home equity line of credit? A lot depends on your personal financial situation, your objectives and goals, and your tolerance for risk. Talk to your accountant or financial adviser and your mortgage lender before making a final decision.
Also, make sure to shop around with multiple lenders to see who offers the best home equity loan rates. Comparison shopping could hold the key to finding the best rates.