You are looking into remodeling your basement and have decided to take out a home loan to pay for it. Now it’s time to find a lender that has it all: low interest rates, reasonable fees, and a repayment plan that fits your monthly budget. If you already have a mortgage on your home, it’s easy to assume that you should apply to this lender for a home equity loan. But is it always the best choice? This is what you need to know.
- Home equity loans use your primary residence as collateral.
- Your current mortgage lender may offer you a lower interest rate or discount on your mortgage loan fees so that all your loans are kept in one place.
- However, it’s worth comparing purchases to make sure you’re getting the best deal.
How does a home loan work?
The home equity loan is secured using your primary residence as collateral. Your equity is determined by subtracting the amount you owe on the mortgage from the current market value of your home. As you make monthly mortgage payments, your net worth grows. Home improvements and a growing housing market can also increase the value of your home and your capital.
When you take out a home loan, you get a lump sum of cash from the lender that you can use for whatever you want. Many people use it for home improvement projects or to pay off high-interest debt like credit cards. The interest rate on a home secured loan is usually slightly higher than on a conventional mortgage because if foreclosed, the mortgage will be repaid first and there may not be enough money left to fully repay the home secured loan. .
Interest on a home equity loan may be tax-deductible if you use the money “to purchase, build, or substantially improve the taxpayer’s home that secures the loan.”
Like conventional mortgages, real estate loans are often subject to fees. These may include an application or initiation fee, an assessment fee, a credit report fee, and a document preparation fee.
Your current lender can only change the interest rate slightly, but they may have the flexibility to lower the fees they charge. So feel free to ask if it will waive or at least reduce, for example, assessment, application or documentation fees.
Is there any benefit in borrowing from your current lender?
Many lenders will offer loyalty discounts to current customers when they purchase a home loan or other loan product. This may be in the form of a reduced interest rate, cancellation or discount on fees, or a combination of both. If the discount is significant enough, it might be worth sticking with the main lender.
Also, some borrowers may just find it convenient to keep all their loans in one place, especially if they are generally happy with their mortgage lender’s service.
Please note that if your lender offers to include your fees in the loan, this does not benefit you much. While this will save you some initial out-of-pocket costs, the fees will simply be added to your loan balance and you can pay interest on them for years.
Is there any benefit from buying from other lenders?
As with any large purchase, comparison shopping can yield the best prices. It is always advisable to approach several lenders for a home security loan and let them know that you are doing it. When lenders know they’re not the only ones playing in town, they’re likely to be more willing to cut or waive fees or work harder to get an interest rate or payment terms that suit your needs.
While turning to another lender may mean yet another online payment setup, it can save you thousands over the life of your loan in interest and fees.
Where can you get a home loan?
Home loans are widely available from banks and credit unions, as well as from some specialized lenders.
How much money can you borrow with a home loan?
The amount you can borrow depends on how many shares you have in your home. Most lenders will allow you to borrow up to 80% of your available equity, even if your home is fully paid off. This is done to protect the lender in the event of a default.
What are the repayment periods for real estate loans?
Home equity lenders offer a wide variety of repayment terms. Depending on what works best for you, you can get a loan for a period of five to 30 years. The longer the term of the loan, the more it can cost you by the time you pay it off.
Can you pay off a home loan early?
Paying off your debt early can save you thousands of dollars in interest over the life of the loan. Generally speaking, most mortgage lenders do not charge a prepayment fee, but there may be exceptions to this rule. So it’s wise to ask your lender before you sign the contract, just in case.
If you have a good relationship with your current lender, you may be able to negotiate a better deal on a home equity loan than you could get elsewhere. But you won’t know for sure unless you also compare the store. So shop around and let your current lender know what you are looking for. If he wants to keep your business, he might come up with a better offer.