How to get the best home equity loan rates

0
251


Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as “Credible.”

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

Shop around

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
LenderSample APRAssumptions
Discover Home Loans7.490%Second lien position, $80,000 loan
Navy Federal Credit Union6.640%Armed forces or Department of Defense relationship, five-year term, 70% max CLTV, $10,000 to $500,000 loan
Regions Bank6.375%Autopay
Spring EQ8.500%FICO 780+, CLTV 60% or less, 5-20 year term, $60,000 to $199,999 loan
Star One Credit Union5.570%15 year term, $250,000 to $750,000 loan, CLTV 80% or less
TD Bank6.490%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:

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.

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.

Get the cash you need and the rate you deserve

  • Compare lenders
  • Get cash out to pay off high-interest debt
  • Prequalify in just 3 minutes

Find My Loan
No annoying calls or emails from lenders!

About the author

Amy Fontinelle

Amy Fontinelle has been a personal finance writer since 2006. Her work has been published by Forbes Advisor, Capital One, MassMutual, Prudential, Reader’s Digest, The Motley Fool, Investopedia, International Business Times, Business Insider, Bankrate, and other outlets.

Read More



Source link