A home equity loan is granted by a lender using your home as collateral. Not all home equity loans are the same. They come in two different types: a line of credit you can draw down like a credit card or a second mortgage, which is a lump-sum payment to you. There are some simple ways to evaluate lenders when choosing a home equity loan so you can negotiate your best deal.
Determine how much you need to borrow and when you need it. If you need a fixed amount up front for a child's college tuition or for a home addition, a second mortgage will allow you to lock in a rate, fixed payment and repayment term. If you have flexible needs, a line of credit, also known as a HELOC, could work best. The lender will issue you checks allowing you to draw on the line as you need it. HELOC's interest rates are usually variable, with payments based on what you borrow. Some allow interest-only payments. They run for a specific period of time, say 10 years, and at the end the full balance could be due in one balloon payment.Step 2
Compare interest rates of at least three lenders. Your largest cost of a home equity loan is the interest rate. When comparing interest rates, every lender is obligated to publish an annual percentage rate or APR. Don't compare the APRs on a second mortgage to APRs on a line of credit. Both are calculated differently. APR for a line of credit includes only the interest rate. The APR for a traditional home equity loan includes the initial fees. Your interest rate will depend on your credit score.Step 3
Compare fees. The difference between lenders is often found in the fees. A home equity loan can have the same fees as a first mortgage. Ask about the closing costs that can include title search, document preparation, appraisal, application fee and points. A point is usually 1 percent of the total loan amount. If you're shopping for a home equity loan, ask for a breakdown of the fees included in the APR. If you're shopping for a line of credit, ask about the cap on the interest rate: that's the most the rate can go up over the life of the loan. You will want to know about any balloon payment due at the end of the term, and your options for paying it.Step 4
Be prepared to negotiate. Know your budget in advance so you don't take on more debt than you can afford. When you have multiple written offers you can now begin to negotiate. Let them know you're shopping for multiple offers. Ask them to reduce the interest rate, knock off fees, reduce points or eliminate the prepayment penalty. Make sure they don't just tack on any decrease somewhere else. Careful shopping can make a big difference.
- When shopping for loans don't forget about your local credit union. They often have low-fee loans for members.
- A home equity loan uses your home as collateral. This could put your home at risk for foreclosure if you default on an equity loan.
John DeSimone is a published fiction and nonfiction writer. He has contributed to regional newspapers and authored several books. DeSimone also teaches writing at two universities in Southern California.