Tapping home equity is now at an all-time high thanks to rising home prices, according to data company Black Knight. That’s leading some homeowners to consider a home equity loan, which allows you to borrow money against the value of your home. These loans typically offer fixed interest rates that tend to be lower than credit card and personal loan rates. In fact, some home equity rates are now hovering around 4%.
You usually get this money in a lump sum, and experts advise that home equity loans are best used to fund home renovations, debt consolidation, emergency expenses, and business expenses, rather than discretionary items like a vacation. This guide from MarketWatch Picks can help you decide if a home equity loan is right for you. And below, we asked experts about the best ways to get the lowest interest rates on home equity loans.
Increase your credit rating
If your credit score doesn’t meet the minimum requirements (which are usually around 620), there are a few things you can do to get refinance. “First, you can look for a lender that has less stringent credit requirements. Just because one lender didn’t agree to your refinance doesn’t mean every other lender will do the same,” said Jacob Channel, senior economic analyst at LendingTree. However, keep in mind that a low credit rating will affect the interest rate you pay on the loan.
Even if you qualify for a home equity loan, there’s a good chance that improving your credit score will earn you an even better interest rate (lenders can look for values above 740 for the best interest rates). To improve your credit score, make monthly payments on time and pay off debt to reduce your credit utilization rate, advises Channel.
Make sure you have a low debt-to-income ratio
Your debt-to-income ratio, or DTI, is simply your monthly debt payments (mortgage, credit card payments, car, student or personal loans, child support, etc.) divided by your gross monthly income. So if your monthly debt is $2,500 and your gross monthly income is $7,000, your DTI ratio is about 36% ($2,500/$7,000 = 0.357). DTI requirements vary by lender, but they often call for a DTI of 43% or less.
Greg McBride, chief financial analyst at Bankrate, says because home equity loans are installment loans, where you borrow a set amount of money at once and then repay the loan over a fixed number of payments, with a low debt ratio and enough income to take over the monthly payments is key. Other important financial factors to consider when applying for a home equity loan are having an adequate income, reliable payment history, and good credit.
The more equity you have, the better
“The more equity you have, the better off you will be. Aim to keep at least a 20% unused share of stock, and even more can get you a better deal,” says McBride. To find out how much equity you have in your home, subtract the amount you owe on all loans from the appraised value of the home.
Look around to get offers from at least 3-5 lenders
“Most of them post their home equity interest rates on their websites. You need to know the approximate value of your home, how much you want to borrow, and how many years you want to pay it off,” says Holden Lewis, home and mortgage expert at NerdWallet. Don’t neglect your current bank either, as having an existing account could mean you’re eligible for promotions or discounts.
“Fees and closing costs can vary by lender, so it’s important to compare annual percentage rates (APRs) as well as fees and one-time costs side-by-side,” said Paul Appleton, head of consumer credit at Union Bank. Home equity loan closing costs often consist of closing fees, an appraisal fee, a credit report fee, insurance costs, document and filing fees, title fees, and taxes, which typically range from 2% to 5% of the total loan amount. according to LendingTree.
Choose a shorter term
Denny Ceizyk, senior staff writer at LendingTree, says the same factors that affect HELOCs also affect home equity loans, although home equity lenders may lower the credit bar a bit, especially if you have more equity in your home. “You’re likely to get a lower interest rate if you choose a shorter term. Home equity loan terms range from five to 15 years, although some home equity lenders offer terms as long as 30 years,” says Ceizyk.
Check out other types of loans
If a home equity loan is costing more than you’re willing to spend, it may be worth considering a home equity line of credit (HELOC) or a personal loan, depending on how much you need to borrow and what you’re using it for use money for.