Home improvement loan “Smack Down” – M&T home equity loan vs. Marcus by Goldman Sachs personal loan

In our first edition of this head-to-head match up, we’re comparing an M&T home equity loan with a Marcus by Goldman Sachs personal loan for home improvements.

New 2018 tax law changes have changed some of the interest deductions related to mortgage and home equity loans, but may preserve it for certain home improvement projects (check with your personal tax advisor for more details). We thought it was timely to explore how home equity loans stack up to other types of loans available for home improvements. For example, how do home equity loans compare to new personal loan products marketed to homeowners for home improvements?

Marcus by Goldman Sachs, Goldman Sachs’ relatively new consumer bank, has begun to advertise personal loans as home improvement loans to homeowners.

How does a Marcus by Goldman Sachs personal home improvement loan compare to a traditional home equity loan? Let’s explore.

(To get a summary of our conclusions, click here to scroll to the verdict)

A brief introduction to home equity loans vs personal loans

First, let’s compare the similarities between a home equity loan vs a personal loan. Both home equity loans and personal loans usually require that you qualify for them with certain credit scores (usually at least 680) and income that shows that you will be able to pay them back.

Both products have a term (length of loan) and an interest rate.

Note, there are many banks who offer either type of loan, so if you are shopping for either, make sure you compare offers, as there are a lot of options to choose from.

Now, let’s talk about the differences.

How the loans are secured

Home equity loans are secured by the home equity you have in your home. A bank puts a lien on your property, as is done with a mortgage, and your home is used as collateral. This means that if you were to stop paying your home equity loan, the bank that you got your home equity loan from could initiate foreclosure proceedings. But because the loan is secured against your home, it makes home equity loans less risky for the lender than personal loans, and less risk means a lower interest rate for you.

Personal loans, on the other hand, are not backed by any asset. Personal loans are “unsecured loans,” meaning you are qualified by your ability to pay, based on credit history, but they aren’t secured by any other asset, like a home. Because they are unsecured against an asset, it makes it riskier for a bank to lend to you as there is no asset held as collateral, and therefore interest rates tend to be higher.

Term of loan

The term of a home equity loan can often be long – 7, 10, 15, 20, 30 years. Some lenders offer home equity lines of credit (HELOC) that are interest-only payments for 10 years, then principal and interest payments for another 20-year term.

For personal loans the term is much shorter, typically two to six years.

Qualification

For a home equity loan or line of credit, you can typically borrow up to a total of 85% of the equity in your home. For example, if your home appraises for $100k and your existing mortgage is $75k, your home equity line could be up to $10k. Generally, you also need to have credit scores of at least 680 or more for home equity loans and home equity lines of credit (HELOC).

For personal loans, the only qualification requirement is that you have the creditworthiness and income to borrow the amount you need. Note that higher credit scores will typically result in lower interest charges and higher income levels will typically result in higher borrowing amounts.

Let’s summarize these differences:

Our test cases: An M&T Bank home equity line of credit vs. a Marcus Personal Loan

To go head to head with a Marcus by Goldman Sachs loan, we wanted to find a home equity loan and home equity line of credit product that would attract the same type of borrower – one with good credit and high enough income to qualify – so that we can make an apple to apple comparison.

We chose the M&T Bank home equity loan and line of credit. Similar to Marcus by Goldman Sachs home improvement loans, M&T advertises their loans to homeowners for home improvement, debt consolidation, unexpected expenses, etc. and requires borrowers to have at least 680 credit score to qualify (the lowest credit score Marcus by Goldman Sachs lists is 660).

Maximum borrowing amount

Marcus by Goldman Sachs: $40,000

M&T Bank: The maximum amount a homeowner could borrow on a HELOC is 85%. As an example, if your home is appraised at $350k, the maximum Home Equity Line or Loan that you might qualify for (depending on your credit score, debts and other factors) would be $297,500.

Term comparison

Marcus by Goldman Sachs: three to six years

M&T Bank: The interest only period is for 10 years, then the homeowner can repay either via a variable rate or fixed rate principal and interest payments for 20 years. As the balance is paid down, the credit line becomes available for future use (during the initial draw period of 10 years). It’s totally up to the customer how much more they want to pay each month over their minimum required payment, depending on how much faster they want to pay down their loan or line (within Fee Comparison guidelines as stated below, to avoid prepayment penalties).

Fixed vs. adjustable rate

Marcus by Goldman Sachs: Fixed rate only

M&T Bank: Customers can choose an interest-only or principal and interest (fixed) payment option.

Fees

Marcus by Goldman Sachs: No fees

M&T Bank: There are no closing costs on Home Equity Lines of Credit or Home Equity Loans. There are no prepayment penalty fees if the Line is paid off within 3 years, as long as the borrower leaves the Line of Credit open. Paid up and closed lines after 3 years will have zero prepayment penalty fees. Paid up and closed lines of credit before three years will incur approximately $700 in fees, which covers the title and appraisal costs.

Application process time

Marcus by Goldman Sachs: Two to five days

M&T Bank: It typically takes about 30 days from application to closing. Customers receive their check books in the mail (to draw on their line of credit) within 2 weeks from their closing, or approximately 6 weeks total (though this can be streamlined if your response time for insurance or other documents is quick).

Interest rates

Marcus by Goldman Sachs: Annual percentage rates range from 6.99% to 24.99% APR. “Only the most creditworthy applicants qualify for the lowest rates, longest loan terms and largest loan amounts. Rates will generally be higher for longer-term loans.”

M&T home equity line of credit:  For a customer seeking a $40,000 Home Equity Line with a 740 FICO score, and up to an 80% loan-to-value ratio (LTV) in a 2nd Lien position (which means they have a primary mortgage too), their rate would be 6.49%, based on 4.50% Prime + 1.99 = 6.49%.

For customers with between 750 – 999 FICO score and below a 69.9% loan to value, the interest rate for a $100k Line of Credit would be Prime 4.5% + .14, or 4.64%. Higher loan amounts result in lower interest rates, and higher credit scores result in lower interest rates.

Cost analysis

Marcus by Goldman Sachs

Because Marcus by Goldman Sachs will not publish their exact rates based on credit score ranges (as they consider it proprietary information), here’s the range of scores that they publicly list:

$40,000 loan, 6 year term (72/mo), interest rate 6.99%

Monthly principal and interest rate payment would be $681.77

Total interest paid at end of term $9,087.31

Total repayment amount at end of term $49,087.31

$40,000 loan, 6 year term (72/mo), interest rate 24.99%

Monthly principal and interest rate payment would be $1052.83

Total interest paid at end of term $35,803.79

Total repayment amount at end of term $75,803.79

Note that the low rate of 6.99% seems unlikely due to the language in their material that says, “Only the most creditworthy applicants qualify for the lowest rates, longest loan terms and largest loan amounts. Rates will generally be higher for longer-term loans”, and since $40,000 is their largest available loan amount.

M&T Bank

Based on the latest rate, for someone who has a first mortgage, with FICO 740 and 70-80% loan to value

$40,000 loan, 10 year term (120/mo), interest rate 6.39%

Monthly Principal & Interest payment would be: $451.96

Total Interest paid at end of term: $14,234.76

Total repayment amount at end of term: $54,234.76

$40,000 loan, 7 year term (84 months), interest rate 6.39%

Monthly Principal & Interest payment would be: $591.85

Total Interest paid at end of term: $9715.36

Total repayment amount at end of term: $49.715.36

INTEREST SAVINGS via a 7 year repayment term vs 10 year repayment term: $4519.40

The verdict

In terms of the interest rate, the M&T loan is the clear winner, as it seems unlikely, based on Marcus by Goldman Sachs’s disclosures that “rates will generally be higher for longer-term loans” that a consumer would get the 6.99% lowest rate listed (and it’s still a few points higher).

For people who need money fast, Marcus by Goldman Sachs advertises a much shorter closing time than M&T offers – five days versus up to 4 weeks.

For people who need higher loan amounts, the winner depends on how much equity you have in your home. Don’t have much equity in your home? Marcus’s $40,000 might be more than you would qualify for from M&T. Do have a lot of equity in your home? M&T allows you to borrow far more than $40,000.

For people who want the lowest monthly payment possible, M&T also has interest-only options and longer terms, whereas Marcus only offers shorter terms which result in higher monthly payments.

As for fees, it’s an even match, unless you close your M&T credit line before three years’ time, in which case you’d pay $700 vs. $0 for Marcus loans.

Where to go to learn more

Marcus by Goldman Sachs has an online process here.

To find out more about M&T loans, visit the M&T Home Equity website page at https://www.mtb.com/mortgages-loans/home-equity. or email Pattie Simone at psimone@mtb.com.

Just a note, in order to be as unbiased as possible, Homeownering takes no revenue from any third parties. Unlike review sites who get paid per link visit or lead, we take no money from other companies at all. This review was done based on reader feedback and interest in different options for home improvement loans. Our only revenue comes from selling our own independent educational products. We have no affiliates.