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With a home equity loan, you can borrow money secured with your property as collateral. It’s a way of extracting equity from your home without doing a cash-out refinance.
To get the best home equity loan rates, it helps to understand how both the real estate market and your finances affect the interest rate lenders will offer you.
Here’s what you need to know about getting the best rates for a home equity loan:
How to find the best rates for home equity loans
Finding the best home equity loan rates depends on two things: being a financially attractive borrower and shopping around to see what different lenders will offer you.
Exceed lenders’ minimum requirements
You won’t get the best rate on a home equity loan by merely meeting lenders’ minimum requirements. You’ll need to exceed them.
The less equity you want to borrow, the higher your credit score, and the lower your DTI, the less risky you’ll appear to lenders. They’ll be willing to give you their lowest available rates because your financial profile will demonstrate that you’ll repay the loan on time.
You can improve your chances of locking in a lower rate by improving your credit and lowering your DTI.
- To improve your credit, start by checking your credit report and disputing any errors, like incorrect late payments or charge-offs, with the appropriate credit bureau (Equifax, Experian, or TransUnion) to boost your score. You may also want to consider enrolling in autopay for your bills to improve your payment history, which accounts for 35% of your credit score.
- To lower your DTI, pay down existing debts, like car payments or credit cards, and avoid taking on any new debt until you lock in your home equity loan.
Check Out: Best Home Equity Loan Lenders
Lenders are competing for your business. They’ll offer you different rates, terms, and fees, and some will have more risk tolerance than others for borrowers with more debt, lower credit scores, or higher LTV ratios.
Below are reputable lenders of home equity loans, plus APR quotes, based on borrower assumptions.
|Sample home equity loan rates, as of Jan. 16, 2023|
|Discover Home Loans||7.490%||Second lien position, $80,000 loan|
|Navy Federal Credit Union||6.640%||Armed forces or Department of Defense relationship, five-year term, 70% max CLTV, $10,000 to $500,000 loan|
|Spring EQ||8.500%||FICO 780+, CLTV 60% or less, 5-20 year term, $60,000 to $199,999 loan|
|Star One Credit Union||5.570%||15 year term, $250,000 to $750,000 loan, CLTV 80% or less|
|TD Bank||6.490%||10 year term, 0.25% autopay discount, $10,000 to $500,000 loan amount|
What is a home equity loan?
A home equity loan is a second mortgage. It lets you borrow against the value you’ve accumulated in your home, whether that value comes from paying down your mortgage principal, housing market appreciation, or both.
You can use the money for any purpose. Possible uses for a home equity loan include home improvements, refinancing high-interest debt, and paying for college.
Your home is collateral for the loan, which is a big reason why this type of loan has a relatively low rate compared to unsecured forms of borrowing, like credit cards and most personal loans.
Keep in mind: Because your property acts as collateral, the lender could foreclose on your home if you were to default on the loan. While this can be risky, tapping into your home equity can be an efficient way to gain access to funds — as long as you’re able to pay off your loan.
What affects my interest rate on a home equity loan?
The following factors influence your home equity loan rates:
- Credit score: It’s a major factor in determining what interest rate you’ll qualify for. Generally, borrowers with good to excellent credit qualify for better rates than borrowers with poor to fair credit. You’ll need a credit score of at least 720 to qualify for the best rates.
- Location: Home equity loan rates vary depending on where your property is. They’ll likely be in the ballpark of national average rates, but will be higher or lower than average depending on what state or county you live in.
- Loan-to-value (LTV) ratio: This compares how much you want to borrow to how much your home is worth. Lenders consider LTV when the home equity loan you’re applying for will be your only mortgage. A lower LTV means you’re retaining more of your equity, meaning you’re not borrowing as much of your home’s value, which poses less risk to lenders and can help you get a lower rate.
- Combined Loan-to-Value (CLTV) ratio: This is the sum of the mortgage you have and the mortgage you want divided by your home’s value. Lenders use CLTV when you have an existing mortgage and the home equity loan will be a second mortgage. A lower CLTV can help you get a lower interest rate.
- Debt-to-income (DTI) ratio: It’s the total of your monthly debt payments divided by your monthly income. A lower DTI makes you a less-risky borrower in the eyes of lenders. For a home equity loan, aim to have a DTI ratio no higher than 43%.
- Occupancy: You’ll get a lower rate on a home equity loan when the home is your primary residence than if it’s your second home or an investment property. How much you can borrow may also depend on occupancy.
- Lien position: A home equity loan could be your only loan, in which case it will be in first lien position and you’ll get a lower rate on it. If you already have an existing mortgage, your home equity loan will be in second lien position and have a higher rate. That’s because the lender whose loan is in first lien position will get paid back first if you default on your loan and your home gets sold in foreclosure.
- The mortgage investment market: Lenders routinely package mortgages together and sell them to investors. These mortgage-backed securities (MBS) have to offer a high enough return for investors to choose them over other places to put their money. Economic factors like inflation, unemployment, stock market performance, and energy prices influence MBS prices and, in turn, mortgage rates.
Learn More: How Does the Federal Reserve Affect Mortgage Rates?
Do I meet the eligibility requirements for a home equity loan?
The requirements to qualify for a home equity loan are similar to those for a new mortgage. In addition to your application, lenders will consider your credit score, DTI ratio, and your home’s equity.
- Credit score: You’ll need to have a credit score of at least 680 to be eligible for most home equity loans, but you’ll lock in the better rates with a higher score. While you might still be able to qualify for a loan with a lower credit score, you’ll likely end up with a higher rate.
- DTI ratio: Your DTI, which is your existing monthly debt divided by your monthly income, should be 43% or less to qualify for a home equity loan.To get a better interest rate, aim for a DTI of 36% or less.
- Home equity: Most lenders want you to keep 20% of your home equity, meaning they won’t let you borrow against the full value of your home. If your home is worth $400,000, you usually won’t be able to borrow $400,000. However, most lenders will let you borrow up to 80% of your home equity, or $320,000 in this scenario.
See: Home Equity Loan and HELOC Requirements
Frequently asked questions about home equity loans
How much can I borrow with a home equity loan?
How much you can borrow depends on the lender and your overall financial profile. Generally, you can borrow somewhere between 80% and 100% of your home’s value on all your mortgages combined.
How much does a home equity loan cost?
Many lenders offer home equity loans with no closing costs as long as you don’t pay off your loan within three years of closing. In that case, the only additional cost will be interest. If the rate is 7.00%, you’ll pay $700 per year, or $58 per month, for every $10,000 you borrow.
When is a home equity loan a bad idea?
A home equity loan is a bad idea when taking on more debt would put you at risk of falling behind on payments and, potentially, losing your home. You don’t want to borrow so much that you’re not able to repay your loan. A home equity loan is secured by your house, so if you can’t pay it back, your lender could foreclose.
What’s the difference between a home equity loan and a home equity line of credit?
A home equity loan is a lump sum that you borrow at a fixed interest rate. You repay it over a term of years in equal monthly installments.
A home equity line of credit is a line of credit for borrowing as needed during a predetermined amount of time called the “draw period.” Similar to a home equity loan, you borrow against your home’s value, and your house backs the loan as collateral. The interest rate is variable and fluctuates as market rates change.
After the draw period ends, you’ll enter the repayment period where you must pay back the principal plus interest over a fixed term, usually between ten and 15 years.
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