How to Get the Best Home Equity Loan Rates in 2019
If you have lived in your home for a while, or if you’ve been diligent about making extra mortgage payments, you’ve built up equity in your home. Equity is the difference between the value of your property and the balance of your mortgage. Essentially, if you sold your home for its full value and then paid off your mortgage, the amount left over would be the equity in your home.
If you want to access the equity in your home without selling it, one option to consider is a home equity loan. As with any loan, you’ll want to be sure you’re getting the best rates. You can find the best home equity rates by shopping around and comparing offers from different lenders.
What is a home equity loan?
A home equity loan is taken out against the equity in your home. Home equity loans typically have a fixed interest rate, which means the rate doesn’t change, and they are secured by your home. This means that if you are unable to pay the loan, the lender could foreclose on your home.
You can also tap your home equity by using a home equity line of credit (HELOC) or a cash-out refinance. A HELOC is different from a home equity loan in that, rather than giving you a lump sum of money, you have access to a revolving line of credit, as with a credit card. With the HELOC, you only borrow as much as you need at a given time.
With a cash-out refinance, you refinance your mortgage rather than taking out a second loan. You refinance for a higher amount than you owe on the home and receive the difference as cash. Instead of having two loans (your mortgage and a home equity loan), you have one loan, but for a larger amount of money.
What goes into the home equity loan rate you qualify for
The main factor when it comes to getting the best home equity loan rates is your credit score, according to Johnny Vlogianitis, senior loan officer at Citizens Bank in Melville, N.Y.
Consumers with a credit score of 740 or higher receive the lowest rates. Consumers with a credit score of 720 to 739 receive the next best rates, and so on. The lowest credit score on the table is 620, so if your credit score is below this, you may have a difficult time obtaining a home equity loan unless you have a co-signer with a good credit history and score.
A few other factors that impact your ability to get the best home equity loans:
Your income. Lenders will confirm that your income is high enough to cover the additional loan. They will also look at your debt-to-income (DTI) ratio, which compares your total monthly debt payments to your monthly income. Your DTI ratio should generally be less than 49%, but some lenders may require an even lower one.
Your loan-to-value ratio. Lenders also look at the relationship between all your loans against your property and the value of your property, which is called your loan-to-value (LTV) ratio. â€œMost banks will go up to about 80% combined loan-to-value,â€ Vlogianitis said. â€œSo if the house is worth $1 million, for example, and someone has a mortgage for $700,000, as long as credit is good and they can show employment, usually they won’t have a problem getting up to 80%, so around $100,000 in home equity.â€
How to shop for a home equity loan
The first step in shopping for a home equity loan is to confirm that it’s the right product for your current financial situation. A housing counselor or another trusted adviser can help you determine which product is the best fit for your needs.
If you’ve determined that a home equity loan is right for you, your next step is to get quotes from different lenders. You may consider starting with a credit union, as they will sometimes have better rates than traditional lenders. The Federal Trade Commission (FTC) also recommends talking with banks, mortgage companies and mortgage brokers. You can also talk to the lender you currently have your mortgage with, or get recommendations from family or friends.
As you talk with different lenders, keep in mind the quality of customer service you receive. The Consumer Financial Protection Bureau (CFPB) recommends only working with lenders you feel comfortable with, and notes that if your lender isn’t open to answering your questions, you should look elsewhere.
How to compare home equity loan quotes
As you shop for the best home equity rates and compare quotes, make sure you’re making an apples-to-apples comparison. The simplest way to do this is to ask each potential lender for the same type of loan and the same features. For example, if you have $50,000 in equity, you could ask multiple lenders for quotes on a 15-year, $25,000 home equity loan (as long as that meets your LTV ratio).
As you review quotes, consider the following (the Office of the Comptroller of the Currency has a handy chart you can fill in as you review quotes):
- The total amount offered to borrow. Depending on the lender’s criteria, you may qualify for different loan amounts. Confirm your loan amount on each quote.
- The monthly payment. This is the bottom-line number you will need to pay each month.
- Repayment term. This is how long it will take to repay the loan.
- Interest rate. In addition to looking at the interest rate, confirm whether the interest rate is fixed or variable. If it’s variable, review the loan information to find out how often the rate will be adjusted.
- Annual percentage rate (APR). â€œThe APR is always a good indication if you’re paying a lot of closing costs, or if you’re paying points as well,â€ said Vlogianitis. â€œIf your interest rate is 6.5%, your APR should be slightly higher than that, but not too much higher.â€
- Closing costs. Closing costs include several fees:
- Origination fee: This is what the lender charges for processing your loan.
- Appraisal fee: To accurately assess the value of your property, your lender will need to get an appraisal.
- Credit report fee: Lenders will need to check your credit, and they typically charge a fee for obtaining your credit report.
- Title search fee: Lenders also need to confirm you are the property owner. To do this, they typically work with the title company and charge a title search fee.
- Notary fee: Your closing paperwork may need to be notarized, depending on the requirements of your state. Your lender may charge a notary fee to cover the costs.
- Prepayment penalties. Some lenders charge a fee if you pay off the loan within a certain time frame.
Carefully review each quote, keeping in mind your overall experience with each lender. If you have any questions, contact the lender.
What’s a good home equity loan rate?
As you look for the best home equity loan rates, keep in mind the average rate for a home equity loan. Home equity loan rates do vary widely depending on your credit score. As of this writing, FICO lists the national average home equity loan rates for a $50,000 loan as:
|FICO Score||10-Year Home Equity Loan Interest Rate||15-Year Home Equity Loan Interest Rate|
|740 and above||6.288%||6.582%|
|720 to 739||6.588%||6.882%|
|700 to 719||7.088%||7.382%|
|670 to 699||7.863%||8.157%|
|640 to 669||9.363%||9.657%|
|620 to 639||10.613%||10.907%|
Home equity loan rates typically trend in line with mortgage rates, but because they are a second mortgage, they are generally a couple of percentage points higher, according to Vlogianitis.
The bottom line
Because home equity loan rates are based on your individual credit score and overall financial situation, shopping around is key to finding the best deal. The more offers you receive, the better your chances of finding a lower interest rate, which can save you thousands over the life of your loan.
To find the best home equity rates, take the time to contact a variety of lenders. You can use LendingTree’s comparison tool for home equity loans to potentially find a variety of lenders. You can also contact your current mortgage company, or ask family and friends for recommendations. Your credit score heavily impacts your interest rate, so if you have concerns, you may want to take some steps to improve your score before you look into getting a home equity loan.