How to Secure the Best Home Equity Loan Rate

Home equity loans can be an excellent financial tool to help pay for expenses like home renovations, college tuition, large purchases, weddings, or significant debt consolidation. To take full advantage of the benefits, though, it’s important to consider the interest rate and how that will affect your repayment of the loan. With a little advance preparation, including doing your research and comparing different lenders, following the steps outlined below can help you secure the best home equity loan rate.

Evaluate How You Look as a Borrower

As with other types of loans, lenders generally base their eligibility requirements and sometimes adjust their interest rates based on risk. There are several steps you can take to evaluate how much of a risk you present to lenders and even improve your standing before you submit any applications.

Check Your Credit Report and Credit Score

Start by checking your credit report. Federal law entitles you to one free credit report annually from each of the three major credit bureaus, and it’s easy to request them online.

Look for any information that is incorrect or incomplete. Common errors on credit reports include misspelled names, incorrect or outdated addresses, closed accounts listed as open, debt listed in multiple places under different names, accounts attributed to you that actually belong to someone with a similar name, and so on. Your credit report should include instructions on how to dispute or correct information.

You should also check your credit score, which is calculated based on your credit history. You will likely receive a credit score with the credit reports you request from the credit bureaus, but you can also ask your credit card company or other lenders to provide you with a credit score report.

Lenders view your credit score as a predictor of your credit behavior, including the likelihood you’ll make on-time payments on your loan. Factors that can affect your credit score include:

• How much unpaid debt you have
• Bill-paying history
• Number of open accounts and how long you’ve had each
• Amount of available credit you’re currently using
• Whether you’ve recently applied for more credit
• If you’ve had foreclosures, bankruptcies, or debt sent to collection in your history and how recently

Review Your Debt-to-Income Ratio

Another financial benchmark that lenders consider is your debt-to-income ratio (DTI). Your DTI compares your gross monthly income to your total monthly debt payments, so lenders can measure your capacity to take on and repay new debt.

Generally speaking, lenders consider borrowers with a DTI below 36 to be low risk but will often consider anything between 36 and 43 to be acceptable. A DTI above 43, however, usually indicates to lenders that you might struggle to repay your loan, which could result in your application being denied or a higher interest rate.

You can use this helpful DTI Ratio Calculator to determine where you stand currently. If it’s on the high side, the good news is that paying down existing debt can improve it quickly.

Assess Your Home Equity

It’s also a good idea to know how much equity you have built up in your home to better understand how much you might be able to borrow. Basically, your home equity is the value of your home minus the amount you owe on your home. For example, if your home is currently appraised at $400,000, and you have $200,000 left on your mortgage, your home equity would be $200,000.

Once you’ve determined how much home equity you have, calculate your loan-to-value (LTV) ratio, which includes the new home equity loan you’re seeking. Most lenders prefer an LTV of 80 percent or lower. A higher LTV could result in higher interest rates.

Strengthen Your Financial Profile

Where possible, strengthen your financial profile before you apply for a home equity loan. Paying down your existing credit card and loan balances can help boost your credit score. Increasing payments on your mortgage can increase your equity. Don’t open any new credit accounts right before you apply. Maintaining a regular income through stable employment will also go a long way toward making you an attractive borrower.

Research Different Loan Types and Understand Terms

Depending on your financial goals and needs, exploring different loan types and terms can help you determine the best home equity loan rate for you.

Fixed-rate home equity loans offer predictable monthly payments, which help you budget and plan long term. Variable-rate options, on the other hand, might have lower rates initially, but they are subject to change based on fluctuations in the market or other benchmarks. If you plan to pay off your loan quickly, a variable-rate loan might be the best option, but be aware of balloon payments or rate-adjustment clauses that can significantly increase the rate during the life of the loan.

If possible, compare the rates of loans that have different terms. Loans with shorter terms will often have lower rates than those with longer terms.

Compare Multiple Lenders

Get quotes from several different lenders, as rates and fees can vary significantly. Credit unions, banks, online lenders, and mortgage brokers are all possibilities. When comparing, be sure to ask about closing costs, additional fees (e.g., appraisal fees), and any penalties (e.g., prepayment penalties) to make sure you have an accurate idea of the actual costs associated with each quote.

Look at the other benefits offered by lenders as well. For instance, choosing a local lender instead of an online lender means you can speak with customer service in person whenever you need assistance. Joining a credit union might give you the best home equity loan rate plus additional membership benefits. Choose a lender that helps you meet your goals.

Remember, you are not required to accept the first quote a lender provides. Don’t be afraid to use competing quotes from other lenders to negotiate lower rates or reduced fees.

Time Your Application Strategically

Because interest rates fluctuate, pay attention to the market for several weeks or months and try to apply when rates are stable or declining. Ask if it’s possible to lock in an interest rate while you’re still comparing lenders.

The Best Home Equity Loan Rate Is the One That Fits Your Needs

While it can be tempting to choose your home equity loan based solely on the lowest rate, it’s important to think about long-term affordability. Can you comfortably make payments for the life of the loan? In some cases, the best home equity loan rate might actually be slightly higher than other options but provide you with more time to pay back the loan, which will give you more flexibility.

With some careful planning, you’ll be in the best possible position to meet your financial goals using a home equity loan.

If you’re in northeast Wisconsin, be sure to check out the home equity loan options at Capital Credit Union.