How can you compare home equity loans? This home equity loan comparison guide will discuss what you need to compare and how to do it. For more personalised support when comparing home equity loans, speak with a free money advice group or commercial service provider.
What is home equity?
Home equity is the percentage of your home you own outright with no existing debt, which can also be told as a financial value as well.
It is calculated by first working out the current market value of your property. Do not confuse this with the price you paid to buy it. Gentrification, renovations and a host of other factors can change market value quickly.
Once you have the market value, you next need to look up your existing mortgage balance, i.e., how much you still owe on your mortgage. Subtract the mortgage balance away from the home’s value to give you your home equity as a figure. For example, a £200,000 property with a £100,000 remaining mortgage would have £100,000 home equity.
But remember, home equity is often expressed as a percentage of the property you own. In the example above, having £100,000 home equity in a £200,000 home would mean having 50% home equity.
The types of home equity loans
Home equity loans can be divided into two different types of credit options. You have the namesake home equity loan, but you also have a home equity line of credit, usually shortened to a HELOC.
We’ve explained how both of these work below.
Home equity loans
Home equity loans are a special type of loan that uses your home equity as security in the loan. By securing the loan with your equity, lenders are able to lend bigger amounts with competitively low-interest rates, subject to personal circumstances and finances. But if you fail to keep up with repayments the lender can force you to sell the home to pay back with your home equity.
The loan amount is based on your home equity. Applicants can borrow up to a maximum of 85% of their equity in some situations, meaning £100,000 equity could get you up to an £85,000 loan. The loan is repaid with a fixed interest rate and repayments start straight away over a fixed term until it is all paid off.
Home equity lines of credit are similar but not exactly the same as equity loans. The homeowner receives the money in instalments at their choosing over a draw period, rather than a lump-sum payment. During the draw period, they are only required to pay a variable interest rate on the amount borrowed. And after that, they must repay the principal and interest over a fixed term until all the loan is repaid.
Both options can be used for unrestricted purposes, including home improvements, debt consolidation, family holidays, car purchases and even repaying a mortgage with a higher interest rate.
What is a good rate for a home equity loan?
Home equity loans and HELOC interest rates are seldom advertised by lenders and are usually discussed in person with applicants or provided through quotes. This can make it difficult to know what is a good home equity loan interest rate.
Some research suggests the average interest rates on these products can vary between 2% and 10%. However, it will all depend on your personal finances and credit score.
The downside to a home equity loan
Using a home equity loan or HELOC puts your home at risk. But this is not the only downside to using these products. Just like many mortgages, both of these typically come with closing costs. A closing cost is a fee payable at the end of the loan agreement for the lender to complete the necessary administration and end the loan.
These costs are usually determined by the loan amount taken out. The bigger your loan the bigger the closing costs. You may be asked to pay an additional 2-5% of the loan you borrowed, which might be hundreds or thousands of pounds.
Home equity loan comparison must-dos
So, what do you need to compare when looking for a home equity loan? Here are the things to think about:
- The interest rate – you won’t know for sure what interest rate you’ll be offered until after making an application (don’t make multiple applications at once!), but you will know the representative rate of home equity loans. You can use this as a way to guide you on what rate you may be offered when considering a home equity loan against others.
- Repayment periods – these products are available at different repayment periods, usually ranging from five to 25+ years. Look to see if the period you want to repay is possible.
- Loan to value ratio – this is the amount of loan they will lend against the value for your home equity. You might be planning on borrowing against a lot of home equity and you should see if it is possible with each lender. For example, one lender’s LTV may be a maximum of 80%, whereas another lender’s LTV might be 85%.
- Minimum loan amounts – sometimes lenders will only provide a HELOC or home equity loan if you agree to take out a minimum amount, often around £10,000. Compare options to see if you meet this amount – and don’t borrow more without good reason.
- Closing costs – as mentioned earlier some of these products come with closing costs, but not all of them. Some lenders add closing costs into the interest rate. You should compare interest rates by factoring in these additional charges.
If you are using a home equity loan to consolidate debts or pay off a mortgage, you will need to make comparisons against your current situation and not just comparisons between different home equity loans and HELOCs. There may be more to think about, including early repayment fees on loans and mortgages, and you may need the help of a debt charity or professional finance service.
Ways to compare home equity loans
If the above makes you want to give up on searching and comparing home equity loans, then there are ways to make it easier. Here are four options at your disposal:
- Use home equity loan calculators
A home equity loan calculator can sometimes be found on bank and lender websites. The calculator is usually a two-step process by first working out how big of a loan you could get based on your home equity. And then it asks what loan amount you need and repayment terms to provide an estimation.
Using home equity loan calculators is an efficient way to compare loans and HELOCs, but it is not always accurate.
- Get a home equity loan quote
A slightly more accurate way of making comparisons is by getting a home equity loan quote. This is where a lender will assess you based on some more personalised information and will not leave a hard search of your credit file.
The only downside to using these quotes to make comparisons is that they are not always available and you might miss out on a better deal with a lender that doesn’t offer equity loan quotes like these.
- Outsource to a finance professional
Commercial finance services are available to help you search the market and find the most suitable loans for your needs. These people can look at home equity loans or they may recommend another credit option that meets your needs. Speaking with them and using their services will cost, but it could save you in the long run.
- Use home equity loan comparison websites
There are home equity loan comparison websites that will do the hard yards for you. You’ll be able to compare options based on the most important metrics and information. However, you should be cautious as some home equity loan comparison websites might be affiliated with some online lenders and the results could exclude some better options not listed.
Is it worth getting a home equity loan?
After completing your home equity loan comparison, you will have a better idea if getting a home equity loan is worth it to you or not. It will depend on personal circumstances and you can get support from money advice charities or even Citizens Advice.
If you are considering one of these loans to consolidate debts or pay off other loans then it will probably be a simple yes-or-no answer once the numbers have been crunched.