Home Equity Loan Terms
The Terms of a Home Equity Loan
Home equity loans, which are sometimes known as second mortgages, allow homeowners to take out a loan against the equity in their home. Home equity loans are divided into two types. The first is a home equity loan, which is a traditional, fixed-rate loan. The other is a home equity line of credit (HELOC). Since one of our other FAQs addresses the details about HELOCs, in this one, we’ll stick to talking about regular home equity loans.
How much money can I get from a home equity loan?
Just like a HELOC, you can usually borrow a maximum of 85% of the equity in your home in a home equity loan. The Federal Trade Commission (FTC) notes that actual amount that you can borrow also “depends on your income, credit history, and the market value of your home.” So, the better credit and income you have, the closer you can get to that 85% threshold.
What are the additional costs of a home equity loan?
While you might think that knowing the interest rate and the monthly payment of your home equity loan is enough to make an informed decision, it’s not. The annual percentage rate (APR) will also incorporate points and financing charges, which will likely increase the amount you have to pay over time. Plus, you can get hit with a variety of fees if you’re not careful-- including application/loan processing fees, broker fees, appraisal fees, lender or funding fees, origination fees, and document preparation fees. Each of these fees might be classified as origination fees, points, or interest-rate adds ons -- and if they’re added to your total loan amount, you could be paying a lot more than you bargained for.
That’s why it’s always important to keep asking questions and let brokers and others know you’re shopping around for the best rate. If you’re lucky, you might get them to drop a lot of the additional fees from the contract -- saving you serious cash.
How are home equity loans affected by the December 2017 tax bill?
More than three decades ago, Tax Reform Act of 1986 got rid of tax deductions on nearly all consumer purchases -- with one main exception: interest paid on “residence-based debt.” Basically, getting a home equity loan allowed homeowners to borrow up to $100,000, while still deducting the interest on their taxes.
Despite that promising incentive, things recently changed. The 2017 tax bill eliminated the home equity tax deduction between 2018 and 2026. Now, homeowners are only allowed to use the deduction if they want to use the money from their home equity loan to “buy, build or substantially improve” their home.
Can you walk away from a home equity loan agreement?
It’s essential to make sure you read your closing papers carefully before signing anything. If you see anything unexpected or suspicious, don’t sign. If you do sign, and immediately realize you’ve made a mistake, you can cancel the deal (without any costs) within 3 days. You’ll need to do so by midnight of the third day, and, you’ll need to provide the lender a written statement within that time period. Calling (or even meeting in person) isn’t enough to cancel the contract. Legally, your lender is required to inform you of your right to cancel (and provide the correct forms) when you sign the initial contract.