Home equity loans — which are 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.
Though home equity loan interest rates are generally lower than rates on credit cards or personal loans, following these tips when you want to tap into your home’s value can help you get the best deal.
1. Think about why you’re borrowing
Just because you can turn home equity — the value of your house minus what you still 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.
Consider a home equity loan if you want to make home improvements that increase value, or to save money by consolidating high-interest debt. Large expenses that can’t be paid another way, like a child’s college tuition or unexpected medical bills, are also reasons you may consider a home equity loan.
2. Check your credit reports and polish your credit score
Lenders look at two important things when deciding how much interest you’ll pay: your credit score and your existing debt. To get the lowest home equity loan rate, check your credit reports before talking to lenders. Examine them for errors that could drag down your score. If you see overdue bills or maxed-out credit cards, get them current and pay them down before applying for a home equity loan.
Lenders look at two important things when deciding how much interest you’ll pay: your credit score and your existing debt.
If you can bump your credit score range from fair to good, or good to excellent, you’ll be rewarded with potential rate breaks that could add up to thousands in savings. But knowing where your credit stands is the first step in helping you compare home equity rate offers.
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3. 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.
Use our home value estimator to see how much your house is currently 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.
4. Start with your current lender or bank and then compare
When comparing home equity loan rates, start close to home. Ask your current mortgage lender, bank or credit union if they offer home equity products. Some financial institutions provide a rate discount when you have multiple accounts or lines of credit, and it may be more convenient to work with a familiar lender.
Including your current lender’s offer, compare home equity loan interest rates from at least three lenders.
Including your current lender’s offer, compare home equity loan interest rates from at least three 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.
5. 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 also deliver the cash you need. Personal loans may also be an option, depending on how much you need to borrow and for how long. These alternatives usually have higher or adjustable interest rates but may make sense if you plan to pay off the loan quickly.
Always ask potential lenders about all possible loan products to ensure you’re borrowing money in the most affordable way.
How to get the best Home equity loan rates
- Make sure you’re borrowing for the right reason, such as home improvement.
- Polish your credit score and look for errors on your report before applying.
- Calculate your loan-to-value ratio.
- Compare rates and fees from three lenders, including your current mortgage lender.
- Consider a HELOC or personal loan if a home equity loan isn’t possible.