You are planning to renovate your basement and have decided to take out a home equity loan to help pay for it. Now is the time to find a lender that has it all: low interest rates, reasonable fees, and a repayment plan that fits your monthly budget. If you already have a mortgage on your home, it’s easy to assume that you should go to that lender for your home equity loan. But is it always the best choice? Here’s what you need to know.
Key points to remember
- Home equity loans use your primary residence as collateral.
- Your current mortgage lender may offer you a lower interest rate or reduced fees on a home equity loan to keep all of your loans in one place.
- Even so, it’s worth shopping around to make sure you’re getting the best deal.
How does a mortgage loan work?
A home equity loan is secured using your primary residence as collateral. Your equity is determined by subtracting the amount you owe on your mortgage from the current market value of your home. As you make your monthly mortgage payments, your principal increases. Home improvements and appreciation in the housing market can also increase the value of your home and your net worth.
With a home equity loan, you receive a lump sum of cash from the lender that you can use for whatever you want. Many people use it for home improvement projects or to pay off high interest debt like credit cards. The interest rate on a home equity loan tends to be a bit higher than on a regular mortgage because in the event of a foreclosure the mortgage would be paid off first and that might not leave enough money to pay off. the home equity loan entirely. .
Interest on home equity loans may be tax deductible if you use the money “to buy, build or substantially improve the home of the taxpayer who is securing the loan.”
Like regular mortgages, home equity loans often come with fees. These may include application or origination fees, appraisal fees, credit report fees and document preparation fees.
Your current lender may not be able to budge as much on the interest rate, but they might have the flexibility to lower the fees they charge. So do not hesitate to ask him if he will waive or at least reduce the fees for an assessment, application or documentation, for example.
Is there an advantage to borrowing from your current lender?
Many lenders offer loyalty discounts to current customers when looking for a home equity loan or other loan product. This may take the form of a reduced interest rate, waived or reduced fees, or a combination of these. If the discount is large enough, it might be worth staying with your primary lender.
Additionally, some borrowers may simply find it convenient to keep all of their loans in one place, especially if they are generally happy with their mortgage lender’s service.
Note that if your lender offers to roll your fees into the loan, it doesn’t pay you much. While this saves you some upfront fees, the fees will simply be added to your loan balance and you could be paying interest on them for years to come.
Is there a benefit to shopping with other lenders?
As with any major purchase, comparison shopping can yield the best prices. It’s always a good idea to check out multiple lenders for a home equity loan and let them know you’re doing it. When lenders know they’re not the only ones in town, they’ll likely be more willing to lower or waive fees or work harder to get an interest rate or payment term that matches your needs.
While going with another lender might mean yet another online payment setup, it could save you thousands of dollars over the life of your loan in interest and fees.
Where can you get a home equity loan?
Home equity loans are widely available from banks and credit unions, as well as some specialty lenders.
How much money can you borrow with a home equity loan?
The amount you can borrow depends on the equity in your home. Most lenders will only allow you to borrow up to 80% of your available equity, even if your home is fully paid off. This is to protect the lender in the event of default.
What are the repayment periods for home equity loans?
Home equity lenders offer a wide range of choices in their repayment terms. Depending on what works best for you, you can get a loan for as short as five years or as long as 30 years. The longer the term of the loan, the more the loan is likely to cost you when you pay it back.
Can you pay off your home equity loan sooner?
Paying off your balance sooner can save you thousands of dollars in interest over the life of your loan. Generally speaking, most home equity lenders do not charge a prepayment fee, but there may be exceptions to this rule. It is therefore wise to ask your lender before signing the contract, just in case.
If you have a good relationship with your current lender, you may be able to negotiate a better home equity loan than you would get elsewhere. But you won’t know for sure unless you also do some comparisons. So shop around and let your current lender know you’re looking. If he wants to keep your business, he can make an improved offer.