Home equity loan three-day cancellation rule
A three-day cancellation rule applies to home equity loans. This is an important consumer protection rule.
Under this rule, you have the right to cancel the transaction until midnight of the third business day after signing the credit contract. The clock starts when you receive a Truth in Lending disclosure providing the details of your loan. Creditors can't release the money from the loan until the third day has passed.
If you choose to cancel the contract, you must provide written notice to the creditor.
Home equity loan costs
Home equity loans can come with high upfront fees. They are often called closing costs because they are paid at the time you close on the loan.
Home equity loan closing costs usually run between 2% and 5% of the amount borrowed. They include:
- Appraisal fees
- Credit report fees
- Loan origination fees
- Document preparation fees
- Attorney fees
- Title search costs
- Notary fees
Some lenders allow you to roll these costs into your loan amount. This will mean you are borrowing more. If lenders advertise "no-closing-cost" loans, this is often what's happening. Some lenders also charge higher rates to cover closing costs in a "no-fee" loan, rather than adding the costs to your loan balance.
Is a home equity loan right for you?
A home equity loan has some significant advantages, but also some disadvantages. Consider the pros and cons of a home equity loan when deciding if it is right for you.
Pros of home equity loans
Here are some of the biggest advantages of home equity loans:
- You can often borrow at an affordable rate
- You have the option to choose a fixed-rate loan, which provides certainty in terms of total costs and monthly payments
- Interest may be tax deductible in some circumstances
- You have flexibility in what you can use the loan proceeds for
- You will know your repayment timeline and total payoff costs up front
If you know exactly how much you want to borrow and can qualify for an affordable home equity loan, this type of mortgage may be right for you.
Cons of home equity loans
There are also some downsides to home equity loans:
- You put your home at risk of foreclosure if you don't make your payments
- The interest rate is typically higher than with a first mortgage
- You could end up owing more than your home is worth if you take too much equity out of your home
- You must know up front how much you want to borrow
- You must have equity in your home to qualify
If you aren't sure how much you'll need to borrow or aren't confident that you'll be able to make monthly payments, you may want to steer clear of a home equity loan.
Alternatives to home equity loans
Here are some alternatives that also allow you to tap into home equity.
Home equity loans vs. home equity lines of credit
Deciding between a home equity loan or a home equity line of credit (HELOC) can be tricky because both allow you to take out a second loan to access equity in your home.
There are big differences between them though. Here's what they are: