If you have equity in your home, you also have formidable ways to produce cash should you need it for home renovations, education, debt consolidation – or whatever. One way is through a home equity loan. But to wring the most from your loan, you must find the lowest rate you can. To help you, here’s how to get a good interest rate on your home equity loan.
What is a Home Equity Loan?
Also known as a second mortgage, a home equity loan allows you to borrow against your home’s equity, which is the difference between your home’s appraised value and your mortgage balance.
Typically, borrowers will get a lump sum to be repaid with fixed installments over five to 30 years. The funds may be used however you wish.
The loan is secured by your home, so be certain you can make the payments before you get one, so that your home is not at risk of foreclosure. If you have that squared away, you can just enjoy a prominent benefit of the secured loan: lower interest rates than credit cards and most personal loans. More on interest rates later.
Who is Eligible?
In addition to the equity you’ve built in your property, lenders will factor in applicants’ credit scores and debt-to-income ratio (DTI), which is the percentage of one’s monthly gross income that goes to debts. Lenders generally like to see a DTI that’s at or under 43 percent. You’ll also need to have sufficient income for Achieve’s home equity loans which also offers the best rates possible.
What About Fees?
Just as you would with regular mortgages, you’ll have fees with a home equity loan. Those will include an origination, appraisal, and recording fee, and possibly more. And, yes, because your equity is determined by your house’s current value, you usually will be required to have your house appraised.
What Factors Determine the Loan’s Interest Rate?
Usually, lenders’ annual percentage rate is based on the prime rate as established by the Federal Reserve. They then add their own margin or markup. When it comes to deciding what rate to offer you, lenders factor in applicants’ specific circumstances. They will look at your DTI and loan-to-value ratio, which is the amount you owe as compared with your home’s value. They will also consider your credit score, which generally should be at least 700. When it comes to your rate, the higher your score, the better.
How to Get the Best Rate Possible
Before applying for a home equity loan, shop around and compare loan rates. What you want to home in on is the annual percentage rate (APR), since those other factors – lender fees, etc. – are part of the final APR.
If you already have a mortgage and are about to compare lenders, you might want to start with your current bank. Why? Because it’s not unusual for lenders to dangle loyalty discounts in front of existing clients to keep their business. Perhaps the reward is a lower rate or the waiving of some fees.
In any case, while you’re shopping, tell each lender what you’re doing and why. That will permit them to compete for the best rate and terms. One proviso, though: if you’re seeking a certain loan length, make sure you do that with each lender. That’s because loans with different terms will sometimes have varying rates. You should also understand that, over time, a longer term at a lower rate may still cost you more.
Ultimately, how to get a good interest rate on a home equity loan largely depends on you and your diligence and patience. You’ll simply need to shop around. You can also do your part by boosting your credit score and reducing your DTI ratio.