Is a home equity loan the best way to save on your mortgage?

Introduction

Which is the best way to save on your mortgage? It's an age-old question with an equally unclear answer. Many people think that home equity loans are the way to go, but should you leave your house to make more money? Or should you hold fast and wait for interest rates to rise through any means necessary?

When you look at it from a financial standpoint, a home equity loan might just save you money on your mortgage. But how does a home equity loan work exactly? What are the best methods of securing home equity loans so that you can get the most bang for your buck?

Home equity loan basics

Home equity loans are a way to tap into the equity in your home to pay off debt, improve your financial situation or save for a future goal.

When you take out a home equity loan, you're borrowing against the value of your home. The loan itself is secured by your home. It's called a second mortgage because it allows you to borrow against the equity in your home.

The best place to look for a home equity loan is through an online lender. You can find lenders with specialized offerings on sites such as LendingTree and LendingClub. If you're interested in refinancing, you should also consider using these sites to find competitive rates on refinancing loans from multiple lenders at once.

Home equity loans come in many different varieties:

A conventional home equity loan allows borrowers to borrow up to 80 percent of the value of their homes (up to $1 million). Typical terms range from five years up to 30 years depending on the amount borrowed and the credit score required for approval.

A jumbo home equity loan allows borrowers to borrow up to 100 percent of the value of their homes (up to $10 million).

Advantages and disadvantages of home equity loans

The advantages of home equity loans are obvious. You can borrow up to 100% of the value of your house, so long as you have a good credit score and aren't upside down on your mortgage.

Plus, you can choose the lender that offers the best terms for you. It's also possible to borrow against other types of assets, including your 401(k) or a car loan.

Disadvantages? They typically require a hefty upfront fee (often more than $500) and an annual percentage rate (APR) that is higher than with most other options. And if you ever want to sell your house, it can be tough to find the right buyer who will pay top dollar for it.

So should you consider a home equity loan? It depends on what kind of situation you're facing and how much risk you're willing to take on.

How to choose between a home equity loan and refinancing

If you're paying off your mortgage with a home equity loan, you'll be able to take out a cash advance on the equity in your home. This is a great way to save on interest payments and reduce the total amount of money you owe — but it's not for everyone.

If you can make your monthly mortgage payments without using any of the equity in your home, then a home equity loan may not be right for you. You should also consider how long you plan to keep the house before deciding whether or not refinancing is an option. If you plan on selling within five years, there may be no point in refinancing because doing so will only add money to your balance due at closing and increase your payments by hundreds of dollars per month (depending on which lender offers this type of interest rate).