How to Get a Home Equity Loan That’s Best for You

Know your credit score and home value, and compare at least three home equity loan rate quotes to get the best deal.
Phil Metzger
By Phil Metzger 
Edited by Johanna Arnone

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Home equity loans, second mortgages that allow you to borrow against your home’s value if it’s worth more than the mortgage balance, typically have fixed interest rates and are paid out in a lump sum.

Consider a home equity loan if you want to make improvements that increase your home’s value. A large expense that can’t be paid another way is another reason you may consider a home equity loan. Education costs are one example.

Home equity loan interest rates are generally lower than rates on credit cards or personal loans. 

Remember that just because you can turn home equity — the value of your house minus what you owe on the loan — into cash doesn’t mean you should. Your house is the collateral for your mortgage, and extracting its value as cash may put you at risk of losing your home if you can’t repay the first or second loan. So make sure you’re using your home equity for the right reasons, primarily expenses that protect or build your wealth.

Here’s what to consider when you want to tap in to your home’s value and how to get the best rate on a home equity loan.

Get the best home equity loan rate

Lenders look at two important factors when deciding how much interest you’ll pay on a home equity loan: your credit score and your existing debt. Doing your homework, comparing offers and improving the factors below will help you get the best possible interest rate on a home equity loan. 

Polish your credit score

To get the lowest home equity loan rate, check your credit reports and dispute errors that could drag down your score. If you see overdue bills or maxed-out credit cards, get them current or pay them down a bit before applying for a home equity loan.

If you can bump your credit score range from fair to good or good to excellent, you could be rewarded with a lower rate and thousands in savings. But knowing where your credit stands is the first step in helping you compare home equity rate offers.

Calculate your LTV

The more equity you have, the more a lender will let you borrow, but for the best rates, aim for a loan-to-value ratio, or LTV, that’s 80% or less.

Click the button below to see how much your house is worth. Then plug that value into our loan-to-value calculator to estimate the equity you can take out, assuming your credit is in good shape.

How much equity do you have?
Your home equity can help you pay for improvements. NerdWallet can show you how much is available.

Know your debt-to-income ratio

Because approval is based on your property as collateral, you may qualify for a home equity loan with a low credit score. However, your debt-to-income ratio — what you owe divided by what you make — can affect your interest rate, so you will want to aim for a low DTI. Paying off debt and avoiding new debt can help to lower your DTI. The NerdWallet DTI calculator can help you find your ratio.

Start with your current lender or bank, and then compare rates

When comparing home equity loan rates, check whether your current lender, bank or credit union offers home equity products. Some financial institutions provide a rate discount when you have multiple accounts or lines of credit, and it may be convenient to work with a familiar lender.

Then compare their offers with home equity loan rates from at least two other lenders. But don’t stop at rates; also consider special promotions, fees and the annual percentage rate, or APR, to determine a loan’s true cost.

Consider alternatives to home equity loans

The one-time payout and fixed rates of a home equity loan may make it seem like the obvious choice, but home equity lines of credit can deliver funds with flexible draw periods, though many lenders offer HELOCs with variable repayment rates that can cost you more when rates increase.

A cash-out refinance replaces your existing mortgage with a larger one that returns the difference to you in cash, but you might end up with a mortgage that has a higher rate.

Personal loans for home improvement may be an option, depending on how much you need to borrow and for how long, but they are based on your credit score and payment history rather than the equity in your home.

Always ask lenders about all possible loan products to ensure you’re borrowing money in the most affordable way.

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