Home Equity Loan Rates: Compare Top Lenders in December 2023
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Current home equity loan rates
Most home equity loan rates are indexed to a base rate called the prime rate, which is tied to the federal funds rate set by the Federal Reserve. The prime rate represents one of the lowest rates that lenders will offer to their most attractive borrowers. When the Fed raises the federal funds rate (which has been going up since Spring 2022), the prime rate also increases.
Lenders will calculate a rate offer based on the current prime rate, along with factors such as your credit score, debts, and income, as well as how much you’re trying to borrow.
Current prime rate | Prime rate last month | Prime rate in the past year — low | Prime rate in the past year — high |
|---|---|---|---|
8.50%. | 8.50%. | 7%. | 8.50%. |
How to get a good home equity loan rate
Your credit score is a major factor influencing your mortgage interest rate. While the minimum credit score accepted by many lenders is 620, You're more likely to be approved for a home equity loan with a credit score of 700 or higher. The lowest rates tend to go to borrowers with credit scores of 730 or higher.
Lenders also consider your debt-to-income ratio — the percentage of your monthly gross income that goes towards paying debts — when determining your rate offer. Typically, lenders like to see a DTI of 43% or less.
Some lenders will offer a discount on a home equity loan's interest rate if you have another account with the bank.
How to calculate your home equity loan payments
In addition to your interest rate and the amount that you borrow, the terms of your loan term will affect your payments. For example, a borrower with a 15-year loan will have higher monthly payments than if they had gotten a 30-year loan, though they will pay less overall because they’re making fewer payments.
How to apply for a home equity loan
Before you apply for a home equity loan, you’re going to need to gather documentation such as:
Current and previous addresses.
Current and previous employer information.
Your social security number.
A government-issued ID.
Your most recent pay stubs and two years of W2s or tax returns.
It’s best to apply with multiple lenders, so that you can compare rate offers. NerdWallet’s roundup of the top home equity loan lenders can help you narrow your selection.
Best reasons to get a home equity loan
The money you receive from tapping your equity is yours to use as you see fit. However, since the loan is secured by your home and you risk losing it if you cannot pay, it’s wise to prioritize expenses that will add to the value of the home and help further grow your equity. Many borrowers use their home equity loan to execute a renovation project, or to repair some part of the home.
When you use a home equity loan to buy, build or substantially improve a home, the interest can also be tax-deductible. This is a unique benefit of home equity loans and HELOCs; if you were to finance the same project with, say, a home improvement loan, you would not be eligible for a tax deduction.
Other options to tap your home's equity
There are other ways to access equity without selling your home.
A home equity line of credit, or HELOC, is a variable-rate credit line, similar to a credit card. You may borrow against your equity, up to a limit. When you repay all or some of it, you may borrow again, up to the credit limit. You pay interest only on the amount you borrow. Usually, the initial interest rates on HELOCs are lower than for home equity loans. But HELOCs often have variable rates, which may rise or fall periodically, while home equity loans have fixed rates. If you want to take advantage of the flexibility of a HELOC but prefer the predictable payments of a home equity loan, you could consider going with a lender that offers a fixed-rate HELOC.
A cash-out refinance replaces your current home loan with a new mortgage for more than you owe, and you take the difference in cash. See the pros and cons of a home equity loan versus a cash-out refinance.
While the primary purpose of homeownership is to have a place to live, it’s also a financial investment — one that, hopefully, grows in value. When your home appreciates and you pay down your mortgage, you own a larger share of the asset. This is called your equity.
For example, if you were to sell your home tomorrow and you have $30,000 remaining on your mortgage, your equity would be the sale price of the home minus $30,000.
If you need access to cash — say, to renovate or make some kind of repair to the house — you can tap your equity without selling your home by getting a home equity loan. You’ll receive the money all at once, which you’ll pay back at a fixed rate for a certain term, often between five and 30 years.
Interest rates on home equity loans are usually higher than interest rates on primary mortgages because they carry more risk for the lender.
If you end up in foreclosure, the home will be sold and the primary mortgage will be paid off first from the proceeds of the sale. The home equity lender will be paid only if there's money left over after the primary mortgage has been paid in full. There's a risk that the home equity lender won't be repaid in full, and a higher interest rate compensates for that risk.
Like a first mortgage, home equity loans often come with closing costs. These are often between 2% and 5% of the total loan amount, and includes factors like the origination fee, appraisal fee and credit report fee, among others.
While it can take minutes to fill out an application, it can take a few weeks, or longer, to actually receive the cash from your home equity loan. Discover, for example, says that borrowers wait an average of 55 days between the application and the payout.
About the author: Taylor Getler is a home and mortgages writer for NerdWallet. Her work has been featured in outlets such as MarketWatch, Yahoo Finance, MSN and Nasdaq. Taylor is enthusiastic about financial literacy and helping consumers make smart, informed choices with their money. Email: [email protected].
