If you're in the market for a home equity loan, you'll want the best rate possible. Here's how to secure the best home equity loan rate.
Homeowners have a lot of freedom with what they can do with a home equity loan. They can cover major renovations, breathing new life into a tired space. They can enable a shift to energy-efficient appliances, lowering utility bills and maybe even helping save the planet. And they can empower value-improving additions to usable square footage, providing homeowners with a great return on investment when it comes time to sell. But despite all the good a home equity loan can do, homeowners should still be sure that they’re getting the best deal –– as a high interest rate may offset some of these perks.
Below are 9 ways for homeowners to get the best interest rates for home equity loans: maximizing the benefits of these valuable financial tools.
A home equity loan, also referred to as a second mortgage, is repaid through a monthly payment at the cost of a fixed (or variable, in certain situations) interest rate. A home equity loan, on the other hand, allows borrowers to take out funds against their home equity. Once this loan has been doled out, homeowners more or less have carte blanche to do with it what they please –– like purchasing new appliances, adding a third bathroom or additional dwelling unit, or accomplishing any of the other goals we mentioned above. Spending frivolously with a home equity loan can pose a threat, however, as the structure of a home equity loan means failure to repay the loan may destroy credit scores.
Existing homeowners should recognize this risk and understand that, when it comes to a potentially decades-long repayment period, a single percentage point difference in interest rates can have a huge impact on the final sum –– underscoring the importance of getting the best interest rate for a home equity loan. You know the risks and the rewards of a home equity loan. Now here’s how to make sure you’re getting the best interest rate.
The first step in getting the best possible interest rate for your home equity loan is understanding where you’re starting. When applying for a home equity loan, as with a mortgage, auto loan, or even a credit card, lenders will want to know that a potential investment with you is going to pay off. And while they can’t predict the future to make sure you’re going to pay your bills on time, they can look at one of the biggest indicators of creditworthiness: your credit score. This three-digit number will be instrumental in your quest for a favorable home equity loan interest rate; a higher score typically equates to lower rates and lower scores to higher ones (or flat out denial.) But no matter where you’re at on the score spectrum, what you don’t want to be is surprised when your loan application is denied.
Fortunately, getting your credit score is easy! Start by obtaining a free copy of your credit report through a site like Equifax (tip: your mobile banking app likely has a credit report feature) and review it for any errors or discrepancies. If your credit score is lower than expected, you can make an effort to improve it by paying the bills on time, reducing your outstanding debts, and addressing any negative items –– like late payments and debts that may have been sent to collections. Rebuilding your credit may take more time than you’d like, and stall your immediate plans for your home equity loan, but it’ll be worth it knowing you got the best interest rate possible.
Interest rates are constantly fluctuating, and staying up to date on current interest rates is an essential part of securing the best home equity loan interest rate. Let’s say your credit score is high enough to qualify for a home equity loan (typically a 680 or higher1), but not high enough to get approved at your desired rate. In this case, you may be debating whether to pay off debts and wait it out or settle for the current rate. While there may be pros and cons associated with each, understanding current interest rates will help make this decision easier.
If the home equity loan rates are at relative lows or on their way up, you might find that now is the best time to apply. But if rates have already risen and show signs of coming down, it might be in the cards for you to rebuild your credit. Pay close attention to financial news, consult online resources, or reach out to local lenders to ensure you’re always working with the most updated information, and you’ll be well on your way toward getting the best home equity loan rate.
Before applying for a home equity loan, you’ll want to determine exactly how much you need. Why? Well, in addition to ensuring you’re not getting in over your head by accessing too much of your available home equity, a more modest loan amount presents less of a risk for lenders and can therefore mean a lower rate. On the other hand, not borrowing enough can leave you just within reach of finishing a project, only to have progress stalled by insufficient funds –– requiring another loan, or forcing you to charge it to a high-interest credit card.
So, rather than basing your loan amount on the maximum amount you can borrow, you’ll want to carefully assess your financial goals, expenses, and home improvement projects to establish a more conservative, accurate figure. Armed with this crystal clear understanding of your financial requirements, you can negotiate loan terms that align with your needs, potentially securing a better rate in the process.
While your credit score, debt-to-income ratio, and current interest rates might seem like concrete figures, different lenders may interpret these metrics in different ways. Where one might see risk, another might see opportunity –– leading them to offer up a more friendly interest rate.
All of this is to say: Don't settle for the first lender that comes your way. Shopping around is essential when it comes to getting the best home equity rate, so be sure to reach out to multiple lenders (both banks and credit unions) and request loan estimates. Comparing the interest rates, fees, and terms provided by each lender will allow you to select the lender offering the most favorable home equity rate and make an informed decision for your future.
For one reason or another, you might find that a home equity loan is not the right option for you. In this case, it’s good to know you’ve got options. Like a cross between a home equity loan and a credit card, a HELOC allows you to borrow against your home's equity as needed throughout the duration of a designated “draw” period. When this period ends, you repay the borrowed amount (plus interest), meaning you can borrow as you go rather than getting a massive loan upfront. This, in addition to the variable rate and payment flexibility, can make a HELOC the better option for some borrowers. Still, it’s worth it to explore the differences between a HELOC and a home equity loan before making your decision.
Getting pre-approved for a home equity loan is like walking into a job interview with another employment offer in hand: you’re wielding most of the bargaining power. Through the pre-approval process, lenders will assess your financial situation and creditworthiness to determine whether you’re eligible for a home equity loan –– and how much you’re able to borrow. This process not only provides you with a clear understanding of how much you can borrow and a ballpark of interest rates you qualify for but also a sort of proof of concept that other lenders are willing to do business with you.
While we emphasized the importance of shopping around earlier, completing standard home equity loan applications often requires “hard” credit checks, which can hurt your score. With the pre-approval process, you can get a sketch of your borrowing power with only a “soft” credit inquiry, ensuring that you’re not hurting your creditworthiness in search of the best interest rate for a home equity loan.2
You know your numbers, you know the market, and you know what lenders are willing to do for you –– more than enough ammunition to negotiate the best home equity loan interest rate. Some homeowners may find negotiating difficult, but this is one of the most important steps toward obtaining the best possible rate.
Start by approaching your preferred lender and discussing the home equity loan rates offered by competitors. Your would-be lender may be willing to meet or beat these terms if it means earning your business. Of course, there’s a possibility they might not be able to budge, but no matter: Negotiating means that, at the very least, you left no stone unturned in search of the best rate.
After you’ve played your cards to the best of your ability and sharpened your negotiating skills, you’ll be met with the final offer. Considering the work it took to get here, you’ll likely be ready to sign on the dotted line and get to work on all the exciting projects you have planned. But before you commit to a home equity loan, be sure to carefully review the final offer provided by your lender. Painstakingly examine the interest rate, repayment terms, and any associated fees to make sure they’re exactly as discussed, and are in alignment with your personal financial goals. If you have any questions or concerns, don't hesitate to seek clarification from the lender –– just be sure to do so before you put pen to paper.
Before you sign this final offer letter, you want to be absolutely sure you understand what you’re signing on for, and it's crucial that you read the fine print of your home equity loan agreement. Things like the terms and conditions, including any penalties, fees, or rate adjustments, will be important to note, as will the repayment schedule and any potential risks associated with the loan.
Home equity loans and HELOCs are great ways to access your home equity, but we’d be remiss not to mention a third option: Truehold’s Sell and stay transaction. By selling your home and cashing out your home equity, you’re bypassing interest rates altogether –– affording you many of the same benefits of home equity loans or HELOCs. Keep living in the home you love as a renter, and enjoy the newfound freedom that your equity can offer, no interest needed!
No matter if you choose to tap into your home’s equity through a home equity loan, a home equity line of credit, or Truehold’s sell and stay transaction, you’ll be delighted to see the difference freeing up this hard-earned equity can make. But without getting the best interest rate for a home equity loan, you might find yourself paying thousands of dollars in interest over the course of the loan –– making it all the more important that you put the above tips into practice, or consider working with Truehold to tap into your home equity.
For more free financial resources from the Truehold team, take a trip to the Truehold library, where you’ll find thorough comparisons of loan products, tips for maximizing your home’s resale value, and information on our sell and stay transaction.
Sources:
1. Experian. What Credit Score Do I Need to Get a Home Equity Loan? https://www.experian.com/blogs/ask-experian/what-credit-score-do-i-need-to-get-a-home-equity-loan/
2. LendEDU. Can I Prequalify for a Home Equity Loan or HELOC? https://lendedu.com/blog/prequalify-for-home-equity-loan-or-heloc/
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