Many homeowners assume they know how to shop for a home equity lender because they’re familiar with the first mortgage process. But while there are similarities between the two loan types, they’re not exactly alike. Before shopping for a home equity lender, you should make sure you know what it is to look for and what to avoid.
Look for a Bank that Lends in Your Area
One of the disadvantages of living in the internet era is that we can easily be overwhelmed by all of the home equity offers that seem to be available in the area. But just understand that most web advertising is geared to specific states or regions, and may not be available in your particular location. That may include some of the most attractive financing offers advertised. The point is, just because you see a rate advertised on the web, doesn’t mean that it will be available to you.
For that reason, your search for a home equity lender should focus on banks that lend in your local community. Not only will they be more likely to have the products offered available, but they also know the market. That means that they can give you the best rate and terms available in your specific community.
At the same time, don’t overlook banks that operate in your state, but don’t have a branch in your town or neighborhood. As long as they lend in your state, they may have excellent programs to offer.
Not All Home Equity Loans are Alike
There’s another fact that you should be aware of in regard to home equity loans – they’re not as standard as first mortgages. Since first mortgages are provided or insured by one of the large mortgage agencies, like Fannie Mae, Freddie Mac, FHA and VA, first mortgage products tend to be standard across the country.
This is not true with home equity loans. These loans are actually made by local banks – and not sold to agencies. The bank that makes your loan will also service it. There can be significant differences between loans from different banks.
Home Equity Loan or Home Equity Line of Credit (HELOC)?
There are actually two types of home equity loan arrangements, home equity loans and home equity lines of credit (HELOC). You should know the difference between the two.
A home equity loan generally has a fixed loan amount, fixed interest rate, and fixed monthly payment. In practice, it works much the same as a first mortgage, but for a lesser loan amount.
HELOCs are essentially credit lines secured by your home. You are given a credit line based on the value of your home, which you can access whenever you need it. You make payments on the loan only if you have a balance outstanding.
HELOCs typically come with variable interest rates, so while there might be a low initial rate, it could rise in subsequent years if certain interest rate indexes increase, such as the Prime Rate or the London Interbank Offered Rate (LIBOR), though it can also decline as well.
Never Assume that You’ll Qualify for an Attractive Rate Just Because it’s Advertised
It’s no secret that lenders present their best rates in their advertising copy. But never assume that that will be the rate that you’ll get. Banks may have different rates available for borrowers with different credit scores and income levels.
There can also be important differences in how banks calculate the loan amount they’ll provide. For example, one bank may lend up to 80% of the value of your home (less any outstanding first mortgage balance), while another may go to 85%. If you need a higher loan amount, you may need to go with a bank that provides a greater equity share over one that has a lower interest rate.
It’s Not Always All About Rate – Read the Fine Print
If you see a home equity loan or HELOC rate, don’t assume it’s set in stone. Read the fine print to see exactly what you’re getting. For example, look for the ability of the bank to change your rate at certain intervals, or even to require a balloon payment. For example, a bank my offer a home equity loan with a monthly payment based on a 20 year payout. But they may require that the full remaining balance of the loan be paid off (or renegotiated) after just 10 years.
Also make sure you understand if there are any fees attached to the loan or line. HELOCs are typically provided free from closing costs, but some banks may charge an application fee, and others might charge an annual fee. Make sure you know what those fees are in advance. Too many fees can be an indication of a non-bank lender, which may not be to your best advantage in the long run.
Watch Out for Prepayment Penalties
It’s unusual for banks to charge prepayment penalties for either home equity loans or HELOCs. This can be another indication that the loan is being provided by a non-bank lender. A prepayment penalty, which is usually a percentage of the loan balance still outstanding and charged at the time of early payoff, can make that payoff prohibitively expensive. And since -prepayment penalties are often based on a sliding scale – the sooner that you payoff, the higher the penalty will be – it may force you to keep the loan outstanding longer than you plan to, and that will cost extra in interest payments over time.
Work with a bank, and you can avoid a prepayment penalty. This will be especially important if you will only need the funds for a short time.
Home equity loans and HELOCs should be flexible loan arrangements that provide you with the options you need to do what it is you hope to accomplish. Be careful of loans that limit those options, and a home equity loan can be one of your most important financial assets.
Monroe Bank & Trust
800-321-0032 | mbandt.com | Locations throughout Southern Wayne County