We’re pleased to share this guest post (with my thoughts) from our friends over at The Simple Dollar. No compensation was given for this post.
A home equity loan can be a convenient ways to get cash, whether you’re looking to make improvements to your home, consolidate debt or even start a small business. But a home equity loan’s costs can vary significantly based on the rates that you get. The better your rates, the cheaper your loan — the cheaper your loan, the more money you can actually borrow. The team at The Simple Dollar dug into the industry to make sure you understand how these loans work and what to look for. They put together a lot of great information and research on everything you need to know about getting the best home equity loan rates. You can also consider a reverse mortgage.
What Impacts Your Home Equity Loan Rates?
The Current National Averages
Home equity lenders tend to have a base rate for their equity loans, which can vary depending on the current economy and the federal interest rates.
Online loan companies tend to have lower rates than brick-and-mortar companies. Likewise, lending companies, banks, and credit unions will all have different rates, calculated based on the amount of risk that they personally are willing to take on. Riskier lenders will have higher rates but lower requirements.
As with any type of lending, your personal credit score and credit history is going to have a significant impact on the rates that you can acquire. For that reason, it’s usually best for you to improve your credit as much as possible before you even apply to loans.
Get As Many Quotes As Possible
You should be comparing multiple loans before you consider any particular lender; the rates and terms vary so significantly throughout lenders that you won’t be able to know whether you’re getting a “good” rate without a comparison. One of the fastest and easiest ways to get multiple quotes is to fill out an online request form. There are many companies such as Lending Tree that will connect you to a variety of lenders, each of which will tell you how much you can borrow and what your interest rate will be.
Improve Your Credit Score
As mentioned, your credit score has a significant impact on your borrowing rates. Begin by pulling your credit reports and correcting any mistakes — a common mistake is misreporting the limit on your credit cards. Once you’ve corrected any mistakes, you should take action to improve the amount of credit you currently have out. Pay down your credit cards and other loans, but don’t close any lines of credit. Closing your lines of credit can actually have an adverse effect.
Your debt-to-income ratio matters. If you can’t improve your income, you need to improve the amount of debt that you presently hold. Something as simple as paying off your car beforehand could have an impact on a substantially larger home equity loan. Remember when you calculate your income to include things such as projected over-time, retirement fund matching, and scheduled or projected bonuses — all of these things do matter to a lender. Pulling your old tax returns may be able to help you if you’re concerned that you might be forgetting any form of income.
Watch Out for Gimmick Rates
When shopping for a vehicle, you may have noticed that sometimes car dealerships have very low introductory rates that then increase to unusually high rates. The same can go for a home equity line of credit. There are certain companies that may advertise teaser rates, but the rate is adjustable. You always want a flat rate loan — no exception. A payment that is comfortable to make now may increase to a payment that is completely untenable otherwise. This also highlights the importance of comparing apples-to-apples when you compare your quotes.
Compare Fees In Addition to Interest
It isn’t enough to just look at interest. Many lenders have hidden fees related to loan origination and loan maintenance — or even the payoff of the loan itself. Make sure that you go through a list of all of the costs associated with the loan so you properly understand how expensive each loan will be. A loan that looks like a good deal on the surface could prove to actually be fairly expensive long-term. As an addition to this, you should always stop to reassess if the lender that you’re currently working with starts adding on more fees — it could indicate that the lender you’re working with is about to become a more expensive option.
Look for Fixed Rate Portions
If you can’t get a fixed rate loan, you can also look for loans that lock a certain amount of the loan in at a fixed rate. This is far preferable to having an entirely adjustable rate loan, though still not quite as preferable as having a fully fixed rate loan. When using an adjustable rate loan, pay attention to how much the lender is able to adjust that rate; some loans may actually give the lender leeway regarding the amount the rate can be increased, thereby making it so that you can’t even anticipate the potential increase.
Remember, home equity loan rates will fluctuate from day to day, in addition to being influenced by your credit. If the current rates are too high, just keep checking — you may find them going down sometime in the near future. You can also always consider refinancing an expensive loan later on, though this can be a risky proposition.
My Personal Thoughts on Home Equity Loans
It’s always important to be careful when you’re borrowing money against your home. I do NOT recommend borrowing additional monies against your home if:
- You’re using the money for consolidation of credit card and other debt and have not gotten your spending under control or are not serious about paying off debt forever
- You’re using the money for a businesses and will have more than a 75% LTV after you take out money for the business. You don’t want to risk losing your house for the sake of a business. Most businesses fail, and you need to take that into consideration when borrowing against your home to start a business.
- You’re using the money to make improvements to your home that will not equal a greater increase in value should you go to sell. For instance, swimming pools. Swimming pools do not add value to a home, so it’s risky to borrow against your home to install one unless you’re in a seriously secure financial situation.