Cost Comparison for Home Equity Loans

If you plan to use the equity in your home, make sure you get the most bang for your buck.


When you take out a home equity loan or home equity line of credit, you borrow against the total value of your house, less the amount you owe on your mortgage. The house becomes collateral, which is why the loans are often called second mortgages. The interest rates are lower than most consumer loans or credit cards, but you'll still need to shop carefully to get the best deal.


The first point you want to compare should be the size of the monthly payments, according to the Comptroller of the Currency. Regardless of how good the rates are and how big the loan is, if the monthly payments are more than you can afford, the loan is a mistake. And although the most common reason for taking out a second mortgage is to pay off credit-card bills, if there's an underlying financial problem that hasn't been solved--a gambling addiction, for instance--a home equity loan may not help, even if it looks manageable on paper.


To compare how different lenders' offers will affect you, you'll need to see them as an Annual Percentage Rate. The APR expresses the cost of credit--interest rates, broker fees, points and other charges--as a single annual percentage, making it easier to see which loans will affect your pocketbook the most.


There's more to the cost of a home equity loan than the interest, the Comptroller's office states: Lenders will charge you broker fees, application fees, underwriting fees, a fee to appraise your house and possibly more. It's important to know exactly what fees you'd be paying because if they're high enough--and they often add up to thousands of dollars--it may wipe out any financial gain from the low interest rate on a home equity loan.

Time Frame

If a lender is offering a variable rate of interest—standard for lines of credit and an option with loans—it will probably start off low, but the timing of any changes will be important. The Comptroller's office recommends you find out when the interest rate will change; how often the lender adjusts it; and how much. If you're offered an introductory discount rate, find out how much the rates will rise when the discount ends.


By comparing all the facts and figures from three or four lenders, you can see which offers the best deal. Don't hesitate to negotiate: Possibly, one of them will be willing to lower rates if it secures your business, particularly if you're a good credit risk or a regular customer.

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