How to Find the Best Home Equity Loans and Second Mortgages
For many homeowners who need to tap into the equity in their homes, the best option is not a standard refinance loan. Instead, the way to go is with an affordable home equity loan, usually as a second mortgage to your current mortgage loan.
The top home equity loans deliver often-overlooked benefits and advantages for homeowners:
- Lower closing costs. Most home equity loans don’t entail the same level of scrutiny and costs as standard first mortgage refinance loan. For example, there are no escrows required; and the appraisal report and title insurance needs are not as intensive.
- Easier underwriting. Although home equity loan providers will examine your income, employment, credit and property value, the underwriting stage is usually faster… because the loan amounts are much smaller.
- Better financial decision. If you have had your current mortgage loan for more than seven years or have already refinanced it to a low interest rate, it doesn’t make sense to refinance it again. With a home equity loan, you won’t have to spend the money and effort on another refinance. An affordable home equity gives you cash from your property’s equity, without the hassle and high costs.
These bullet points deserve emphasizing… especially if you currently have no mortgage balance on your property.
A home equity loan doesn’t have to be a second mortgage. It’s actually a worthwhile alternative to standard first mortgage loans.
If you need to take cash out of your property’s equity and you have zero (or very little) first mortgage balance, then take the time to compare the home equity loan against a standard refinance.
As you’ll see, the standard refinance loan may offer better interest rates on long-term (30-year fixed-rate) loans. But the home equity loan’s interest rates are competitive on short-term and adjustable rate mortgage (ARM) loans — and their closings costs are much lower.
Available Home Equity Loan Programs
Unlike standard first mortgage loans, there’s not as much variety available with home equity loan programs. Most banks and mortgage companies who offer home equity loans offer just a handful of programs, and the two basic choices are fixed-rate or ARM (variable rate) loans.
Depending on the lender, the home equity ARM loan’s interest rates are tied to either Prime Rate or LIBOR (London Interbank Offered Rate) index. Home equity loans based on the LIBOR may adjust every few months or so, while loans based on the Prime Rate will adjust whenever the Prime Rate is adjusted.
Mortgage home equity lenders will vary the interest rate they charge on a programs according the combined loan-to-value (CLTV) ratio of the home equity loan. The CLTV is calculated as follows:
- Add the proposed home equity loan amount with the current mortgage balance on any current first mortgage loan on the property… to determine the combined loan amount
- Divide by the property’s appraised market value… to determine your CLTV ratio.
The best home equity loan interest rates are reserved for home equity loans with CLTV ratios below 80%. As you get closer to 100% CLTV, your interest rates will go up rapidly.
Most home equity loan providers, in fact, will only offer home equity loans up to 85% LTV. However, there are quite a few lenders who do offer up to 100% CLTV (which maxes out all the equity in your property). A few lenders will even go up to 125% CLTV, for home improvement equity loans that has the capacity to increase the property’s value.
Keep in mind that depending on your situation, you may want to take a look at the two main alternatives to home equity loans: reverse mortgage loans (for seniors age 62 and over) and the home equity line of credit.
Shopping for the Best Home Equity Loans
To find the best home equity loan for your situation, start by getting an idea of what type of home equity loan program you need. How much equity do you think your property has right now… and how much of that equity will you need to access?
Then get going by contacting the bank with whom you have your checking and savings accounts. In fact, you’ve probably already been receiving regular home equity loan advertisements from them via email or included in your monthly statements.
But don’t stop there.
Compare it with the home equity rates offered by other lenders and providers in your area. Again, the web makes this easy. So we no longer have any excuse. Remember that an hour or two surfing the web and comparing home equity loan quotes from competing lenders can save you hundreds, if not thousands, of dollars over the life of the loan.
