Guide: Finding the Best Home Equity Loan Interest Rates
Upgrading your home to a more modern abode or investing some money into a large purchase can feel necessary at a certain point in life.
Of course, if your bank account isn’t flush with cash, you may not feel like you can take advantage of those things without taking out a home equity loan.
Simply by paying your mortgage bill, you are building equity in your home that you can tap into if you need to. If you’re ready to take that leap and look for a loan, how do you know if you’re getting the best home equity loan rates?
Home equity loan rates can vary depending on any number of factors: the type of home equity loan you find, your credit score, your debt-to-income ratio, and your lender.
With so many variables coming into play, AdvisoryHQ wants to take the time to help you understand what you need to do to find great home equity rates.
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A home equity loan will typically be with you for the next decade or longer. Even a slight difference in interest rates on home equity loans could cost you thousands of extra dollars.
Before you begin to badger your bank about home equity loan rates, we’ll carefully walk you through the details involved with the best home equity rates.
Various Types of Home Equity Rates
While many individuals prefer to use “home equity loan” and “home equity line of credit” interchangeably, the truth is that they are vastly different types of loans.
Beyond the differences in how they work, their home equity loan interest rates will also function in different ways. Before we dive too far into the specifics of how to find the best home equity loan rates, we will recap what these two important types of loans entail:
Home Equity Loan
A home equity loan taps into the value of your home and typically offers you one lump sum payment up front in accordance with what your lender has offered you.
These are helpful if you are in need of a large chunk of money initially for your project or purchase. Sometimes these are also referred to as fixed rate home equity loan options because they typically do come with fixed interest rates.
In the eyes of many, this type of home equity loan is preferred because it allows homeowners to search for the best home equity loan rates and lets them lock it in place for the duration of the loan. Budgeting and planning ahead for paying off your loan is easier when you have fixed home equity loan rates that you come to expect.
Home Equity Line of Credit
A home equity line of credit, often abbreviated as a HELOC, is a loan that works similarly to a separate credit line. Lenders allow you to tap into the equity of your home using a credit card or checkbook to pay contractors or make multiple purchases over a period of time. Searching for the best home equity rates with a home equity line of credit is important, but not ultimately significant, as many of these have variable interest rates.
While it is possible to receive fixed home equity loan rates on this loan product, it is far more common to see variable interest rates during the initial period. Even if you find the best home equity rates initially, these will likely change during this time period, leading to a fluctuating monthly payment.
Because rates on home equity loans like these change over the course of time, there are a few pitfalls you should be aware of when you compare home equity loan rates. We will go into some of these disadvantageous advertising schemes in the next section.
Home Equity Rates that Change
When you begin to look at home equity lines of credit, it is possible to find that the rates on home equity loans will vary over the course of time. As we already discussed, this is typical on loan products of this variety. However, you should keep your eyes wide open when it comes to a very specific advertising strategy that many lenders will use to attract new customers: offering lower introductory home equity loan rates that jump up significantly as time passes.
You may feel like you found the best home equity rates with your lender, but be sure to ask more questions about how long that rate is good for. Some lenders may only offer those home equity rates for a brief period of time. Perhaps the first six months feature low home equity loan rates, but the rest of the loan is characterized by values more statistically in line with the rest of the market.
Another common pitfall that consumers fall into is not paying attention to promotional markup rates. Rates on home equity loans are typically calculated from some standard rate (such as the prime rate issued by the Wall Street Journal) as well as an additional markup from the specific lender. For example, your home equity loan interest rates may equal to the prime rate plus an additional two percent each month.
Lenders will sometimes advertise interest rates on home equity loans that make them sound like the best home equity rates simply by lowering the markup for a period of time. You may find that the introductory offer is the prime rate plus one percent, but it increases to the prime rate plus two percent just a few months into the course of your loan.
You may feel like you’re receiving the best home equity loan rates when you initially begin discussions with your lender, and it’s still possible that you are. However, you should be well aware of what the introductory offers are, exactly when they will end, and what your home equity rates will be at that time.
Qualifications for Good Home Equity Interest Rates
If you’re puzzling over what you need to do to qualify for great home equity interest rates, it might be time for you to take a deeper look at your current financial situation.
It is hard to give a definitive answer of what your home equity loan rates could be because it is so heavily dependent upon your personal financial information including your credit score and your debt-to-income ratio. Finding good fixed home equity loan rates can be impossible if you don’t have these two items in order.
Studies put together recently by myFICO demonstrate what a significant difference your credit score can make when it comes to home equity rates.
The national average APR for a $50,000 home equity loan over a ten-year term was 5.48 percent—for borrowers with an excellent credit score of 740 or higher. For individuals whose credit was closer to the average range (between the low to mid-600s), the national average APR for a fixed-rate home equity loan jumped to a whopping 9.08 percent APR.
Overall, this makes for a monthly balance difference of more than $100 or a $13,560 difference over the term of the loan just because of your home equity loan rates.
Homeowners who had credit scores less than average found that their rates for home equity loans were even higher, if they could qualify at all.
The other most important qualification for great interest rates on home equity loans is a low debt-to-income ratio. Unfortunately, there is no magic number that guarantees you the best rates on home equity loans.
Each lender provides their own standard percentage that they will allow. In most situations, they prefer that number to be at 40 percent or even lower.
This means that if you are looking for good home equity interest rates, it might be beneficial for you to finish paying off your car loan, dissolve some student loan debt, or otherwise get your monthly budget in order before you start to compare home equity loan rates.
Take a Look at Rates for Home Equity Loans
Before you start making commitments to lenders, it’s vital to take a look around at the current rates for home equity loans.
These home equity loan rates can vary significantly depending on the term of your loan, the amount you borrow, and whether you opt for a home equity loan or a home equity line of credit.
Understanding the current climate for home equity loan rates can make a big difference in whether you know if you’re receiving the best deal.
Below is the range of the average APR for home equity loan interest rates in a variety of situations. All of these fixed home equity loan rates are current at the time of writing (September 2016) according to myFICO and are for credit scores ranging from 620–850. They assume an overall loan amount of $50,000.
- Home Equity Line of Credit: 4.683% to 10.683% APR
- 10-year Home Equity Loan: 5.48% to 9.805% APR
- 15-year Home Equity Loan: 5.828% to 10.153% APR
Source: Home Equity – myFICO
Rates on home equity loans are constantly fluctuating. If you monitor the home equity rates through sites like this one, you can begin to see whether the home equity loan rates are remaining stagnant, increasing, or decreasing.
Seeing patterns in relationship to interest rates on home equity loans will help you ensure that you get the best home equity loan rates on the market when you decide to move forward.
Comparing Home Equity Loan Rates
If you want to be sure that you’re getting the best home equity loan rates, it’s critical to compare home equity loan rates. Whether you’re interested in a fixed-rate home equity loan or one that will feature variable home equity rates, comparison shopping helps you to see all the available choices and to make the most educated decision possible.
For starters, you can use broker services such as Lending Tree to begin gathering information.
Lending Tree allows you to fill out a short questionnaire regarding your personal information (value of your home, existing mortgage, requested loan amount) that takes only a few minutes. They will then pair you with several lenders that match the information you submitted.
Take this time to compare home equity loan rates from multiple lenders and select the one that features the most favorable terms and the lowest home equity rates. This is a stress-free way to evaluate multiple providers all at once.
Keep in mind that it’s okay to window shop for the best home equity loan rates among a few different lenders.
While the inquiries will likely show up on your credit report, the credit bureaus can typically identify that you are shopping around for the best deal on a loan. You can “rate shop” under the most models for your credit score without the multiple inquiries having a profound effect on your overall credit score.
The length of time that you can comparison shop and browse the various lenders will vary. The time period usually lasts between fourteen and forty-five days. According to Credit Karma, this window typically applies for categories such as auto loans or home mortgages.
Tools for Home Equity Rates
Once you have spent some time window shopping through the various loan options available to you, you can input that data into Bankrate’s loan comparison calculator.
This helpful tool helps you to see the monthly payment differences between various lenders and the options provided to you. It can be a helpful tool to put concrete numbers to the influx of data lenders will give you regarding their home equity rates.
Source: Home Equity Loans
You can also use their comparison calculator to compare various home equity rates depending on what sort of loan you are interested in, your credit score, and your specific area. Because APR can be area-specific, this may give you a more realistic picture of the home equity loan rates in your zip code.
If you’re considering getting started on comparing the best home equity loan rates, you may want to consider a few of these choices:
- Bank of America: This large financial institution typically allows a higher loan-to-value ratio and gives you custom rates quickly without requiring a full application.
- Wells Fargo: Wells Fargo will allow you to qualify for good home equity rates with credit scores as low as 621, but you qualify for the best home equity loan rates with credit scores in excess of 760.
- Citibank: Citibank offers good home equity interest rates with higher debt-to-income ratios than other lenders do (43 percent).
There are a number of options out there to help you find the best home equity loan rates. However, it’s important to keep in mind that there are nearly endless choices available for home equity rates. Your specific rates will be dependent upon your unique financial status and overall picture of fiscal responsibility. This is just a cursory list to give you a starting point when you begin researching home equity rates.
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Conclusion: Finding the Best Home Equity Loan Rates
A home equity loan or line of credit can give you a number of choices when it comes to remodeling your home or purchasing a big ticket item. But if you’re planning on tapping into the equity of your home with a loan, you want to be sure that you find the best home equity loan rates on the market.
Fixed home equity loan rates are decided upon based on your financial situation: the status of your credit score, your debt-to-income ratio, and the equity you’ve built up in your home. Using some of the comparison tools, you can compare home equity loan rates quickly and easily to determine which lender offers the best home equity rates for your needs.
Bear in mind that the difference of just a few points on your home equity rates can make a difference that totals thousands of dollars over the course of your loan term. Make a wise decision and shop around at a few different places to make sure you’re offered the lowest home equity loan rates you can find.
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