If your house is worth more than you owe on it, a home equity loan can help provide funds for any large expense. Often, these loans offer much lower interest rates than personal loans or credit cards. Home equity loans are best for big, one-time purchases that will improve the value of your home or increase your family’s income. Such items include home renovations, higher education, or debt consolidation.

Home equity loan or HELOC?

In order to find the best home equity loan it is important to take into consideration whether you want a traditional home equity loan or a home equity line of credit (HELOC). A home equity loan is an upfront lump sum of money with a fixed interest rate and fixed repayment terms.

In contrast, a HELOC offers you a maximum credit amount and allows you to borrow multiple times while paying a principal amount and interest on the amount you actually borrow. Essentially, a home equity loan is ideal for large one-time expenses and a line of credit is a better option if you want access to funds over a longer period of time.

Unlike a traditional home equity loan, a HELOC interest rate is tied to a benchmark interest rate, like the Wall Street Prime Rate. This means that the HELOC interest rate is subject to change over the loan term and will increase or decrease as the  prime rate changes. Many HELOCs include a lifetime cap which prevents the interest rate from exceeding a maximum percentage, even if the prime rate goes above the capped rate. For example, if a HELOC is issued with an 18% cap and the prime rate jumps to 20%, your interest rate will never go higher than 18%.

Make a plan

Before you begin searching for the right loan, create a detailed plan of your expenses and income to determine the minimum and maximum amount you are willing to borrow. Next,  identify which type of loan or line of credit is the best option for you. Make sure you understand the risks involved with taking out a home equity loan, including the risk of losing your home if you default on the loan.

Chose a time period

In order to find the best loan, find out how much per month you are able to pay. Depending on how much you plan to borrow, you will need to chose a time period in which you can comfortably afford to repay a portion each month. Repayment periods typically last between 5 and 15 years, with longer terms having higher interest rates.

Compare

When it is time to get a loan, compare  estimates from several different lenders. Shop both online and locally in order to find the best rate for you. Carefully compare interest rates as well closing costs and fees. Make sure to take into consideration the company’s reputation and their customer service.   

Be cautious with online lenders. It is common for them to advertise low rates but not offer the same rate after the application process. With no one in person to answer questions, it can be easy to misunderstand questions on an online loan application. When working with a representative at a local credit union, you can ensure that your application is accurate and can prevent any hold-ups from happening. Plus, credit unions offer a more personalized experience and are more likely to take into account factors other than credit scores and pay stubs when customers apply for a loan.

Interested in applying for a home equity loan? Check out Common Trust Federal Credit Union’s home equity loan page or contact your local branch representative to learn more!