A friend asked me where he can get the best rate on a home equity loan.
I assume he knew the difference between a Home Equity Line Of Credit (HELOC) and a home equity loan and he already decided he wanted a home equity loan. In case you don’t know, a HELOC works like a credit card without the grace period. You can keep it open until you want to borrow, and you can borrow and repay repeatedly. A home equity loan works like a car loan. You borrow one lump sum up front and you repay over a set period of time. A HELOC typically has a variable rate, priced at the Prime Rate plus or minus a margin. A home equity loan typically has a fixed rate, although there are also adjustable rate home equity loans.
When you get a mortgage, the bank typically ends up selling the mortgage to Fannie Mae, Freddie Mac, or the like. The bank gets paid a markup on top of the wholesale price for interacting with you and doing the paperwork. As a result, the mortgage rates from different banks and credit unions usually don’t differ by more than 0.5%. If the best rate you can find everywhere is 3.25%, you won’t get charged more than 3.75% for the same loan if you just walk into a random bank. Usually they are within 0.25% of each other.
Home equity loans, on the other hand, are typically retained by the bank. The rate can be quite different from bank to bank. The best rates are usually from credit unions. Some banks don’t even offer home equity loans; they only do home equity lines of credit.
I checked with a few banks and credit unions. The rates below are for a $50k 5-year fixed rate home equity loan with maximum 80% loan-to-value ratio and the best credit scores.
| Bank or Credit Union | Rate |
|---|---|
| Digital Federal Credit Union (DCU) | 3.49% |
| Pentagon Federal Credit Union (PenFed) | 3.74% |
| U.S. Bank | 4.24% |
| Northwest Federal Credit Union | 4.25% |
| Andrews Federal Credit Union | 4.49% |
| Alliant Credit Union | 5.50% |
| Citibank | 6.24% |
Between the best rate from DCU and the worst rate from Citibank, the difference is 2.75%! Not all large banks are bad though. U.S. Bank comes in better than several credit unions.
DCU and PenFed are my go-to places for best rates on loans. If you can find a better rate locally, great. Otherwise just go with either DCU or PenFed. Both have open membership nationwide. You join by paying a small membership fee to a supported organization.
Cash Out Refi
If the rate on your primary mortgage is still high, doing a cash out refinance as an alternative to getting a home equity loan can kill two birds with one stone. You lower the rate on your mortgage and you get some cash out for home improvement. Especially when you refinance to a 15-year loan, the rate you get is quite a bit lower than the best rates on a home equity loan.
The downside is there is going to be more paperwork and it’s going to take longer than just getting a home equity loan. But if you are refinancing your primary mortgage anyway, there isn’t much incremental effort. You still have to make sure you are still getting the best rate when you make it a cash-out refinance versus no cash-out. When I did it a few years ago, cash-out versus no cashout made no difference up to 60% loan-to-value. Beyond that you would pay a higher rate on a cash-out refinance. I don’t know whether it’s still the same limit today.
Say No To Management Fees
If you are paying an advisor a percentage of your assets, you are paying 5-10x too much. Learn how to find an independent advisor, pay for advice, and only the advice.
D says
Keep an eye on local billboards. By me its not unusual to see local banks offering HELOCs around 2% for teaser periods of 6-24 months. Afterwards the rate resets to prime +25 or 50 basis points.
A couple years ago when I was almost paid off on my house I moved into a 12 month teaser rate HELOC for 2%. I knew I had some reasonably sure-thing equity compensation vesting within the 12 months and that once paid off having an open HELOC line with 9 more years to draw on would be handy. A few years later it is handy as I am moving and the lender re-offered the 2% rate till January 2017 (like a 5 month promo that coincidentally matched my needs) and I am now going to tap my HELOC to cover a down payment on my new house (changing jobs).
Another plus on HELOC’s is that closing costs are often as little as a $3-400 appraisal which the bank might waive, although if you close it early banks may make you pay them back.
Willy j says
Just closed on a HELOC on my rental property a couple months ago (my now primary and only loan on the property and 60% LTV max)…. floating of 4% from Wells Fargo with the option to fixed rate advance anywhere from 2-5% (1 to 5 year rate lock)……. nice piggy bank for emergencies vs holding a bunch of cash and using a portion of the loan at the lower interest rates to pay down other debts faster
Raghu says
@Willie, how did you manage to get a HELOC on your rental. I have tried in vain.. I can get a heloc on my primary home but not for a rental property.
Jo Johnson says
Reviews of DCU and Pen Fed are horrible!!
A.J. says
Yes, reviews of those suggest they suck. And even the others on the list except the 2 highest interest rate ones also get horrible reviews.
TJ says
All the reviews of PenFed I’ve read suggest that as long as you’re organized, you’re fine.
If you don’t want to do the extra work to save the extra 50bps, just go with US Bank.
AJ says
No, the message about PenFed is much bleaker. Your take-home from more than 60% horrible reviews out there is that being organized is the way to have a positive experience with PenFed? If so, then you either do not have the ability to accurately summarize the available reviews, you have a memory deficit from what you just read, or you’re getting paid by PenFed.
In actuality, PenFed gets horrible reviews ( excluding the one that says being organized increases someone’s chances that things will go well with them. By the way, Credit Karma isn’t the only place to search for reviews of financial institution that give HELOCs.
Ashley Maxwell says
Thanks for your tip to refinance before getting a home equity loan if possible. I didn’t know that most of them came from credit unions. My husband and I are considering getting a home equity loan that we can realistically and eventually pay back.
Sandy says
What is the best way to go if you Want to consolidate debt