How to compare home equity loans, according to experts
Are you interested in tapping into your home equity? That may be a wise move. After all, home equity loans can be less costly than other borrowing options right now. But, it's important to keep in mind that home equity loans aren't all equal. In fact, these loans are complex products. And, even subtle differences between your options can have a meaningful impact on your borrowing experience.
So, it's important to compare multiple offers before you borrow against your home equity. But, if this is your first time taking out a home equity loan, you may be at a loss for the factors you should compare. We asked some experts for what to look for as you compare your loan options.
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How to compare home equity loans, according to experts
Follow the steps below as you compare home equity loans to make sure the one you take out is competitive.
Step #1: Make a list of reputable lenders
The first thing you should do as you compare home equity loans is make a list of reputable lenders. If you're not sure which lenders have a solid reputation in the home equity market, consider Rocket Mortgage, LoanDepot, AmeriSave Mortgage, Upstart Mortgage and Better.
But, these aren't the only lenders out there. Make sure to include any home equity lender that you know and trust so your comparison is as comprehensive as possible.
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Step #2: Compare interest rates
"Different lenders offer varying interest rates on home equity loans," explains Matthew Teifke, founder and principal broker of the real estate agency, Teifke Real Estate. "A lower interest rate can reduce your overall cost of borrowing."
That's important because interest plays a significant role in the overall cost of borrowing your equity. So, it's important to make sure you have the most competitive rate possible. Keep in mind that the average interest rate on a 10-year home equity loan is currently 8.76% and 8.76% on a 15-year home equity loan.
Step #3: Compare closing costs and other fees
"When you comparison shop among lenders, go beyond asking for quotes on interest rates," says G. Brian Davis, founder of the real estate investing club, SparkRental. You should ask about closing costs and "flat fees (junk fees) that they charge as well, to compare the total cost of borrowing."
While interest is a significant cost factor when you take out a home equity loan, closing costs and other fees can also play a meaningful role in your overall expense. So, compare all fees that come with each option you're considering and think about how those costs will play into the overall cost of your loan.
Step #4: Look for prepayment penalties
Prepayment penalties are fees that you may be required to pay if you decide to pay your home equity loan off early - and they're commonplace in the home equity industry. But, lenders set their own penalties. Some charge higher penalties than others and some may phase out sooner than others.
So, you should "ask if the lender charges a prepayment penalty as well, and when it phases out" if they do, says Davis. After all, if you decide to pay your loan off early, having the lowest prepayment penalty possible - or no penalty at all - would be advantageous.
Step #5: Negotiate closing costs to break any ties
At this point, you should have whittled your list of potential home equity lenders down to a few financial institutions that are tied in terms of reputation, interest rates, closing costs and other fees and prepayment penalties. If that's the case, break the tie by attempting to negotiate your closing costs. Ask each lender what they can do to bring your closing costs down and choose the one that offers the largest concessions.
The bottom line
Home equity loans may give you access to the money you need at a competitive cost. But, it's important to compare your options. As you do, pay close attention to interest rates, closing costs and other fees and prepayment penalties. And, consider negotiating closing costs with lenders to break any ties once you've narrowed your options down. Compare today's leading home equity loan options now.
