About Low Home Equity Loan Rates

By Steve Hane

  • Overview

    Low home equity loan rates are driven by a number of forces including index rates (such as the prime rate), the value of a home and an individual's credit score. Each of these factors, as discussed briefly here, directly affects low home equity loan rates.
  • What Is the Index Rate?

    An index rate is an interest rate that a loan rate is based on. Many home equity loans may be a fixed rate as opposed to a home equity line of credit (HELOC) that is more often a variable rate. Even if the rate is fixed, it is based on a given index rate plus a margin to determine the rate that will be offered on each loan package. One of the most common index rates is the Wall Street Journal Prime Rate. This rate is generally 300 basis points or 3 percent greater than the Fed Funds rate. Another popular index rate is the London Interbank Interbank Offer Rate (LIBOR) that has 4 different rates including 1 month, 3 month, 6 month, and 1 year rates. Bankrate.com is a website that publishes these and other rates on a regular basis. To know which index rate is used in computing a given home equity loan package, ask the lender or review the loan documents.
  • What Is Margin?

    To calculate the rate offered on a home equity loan, the bank will take the index rate and add a margin that is a percentage above (or sometimes below) the index rate. This accounts for most of the profit the lending institution will make on your home equity loan. This margin varies based on a number of factors related to the risk of the loan. The riskier the loan, the higher the margin will be, resulting in a higher interest rate. Some of these risks include a low credit score of the borrower and decreasing home values.

  • How Does Credit Score Affect Home Equity Loan Rates?

    The higher your credit score the lower your risk to the lender and therefore the lower the loan rate they can offer you. If you have a low credit score resulting from factors such as late payments, high balances on existing credit accounts, credit defaults and bankruptcy, you present a higher risk and the resulting home equity loan rate will be higher. Know and understand your credit score before applying for any loan. One of the most common credit scores is FICO, created by the Fair Isaac Corporation. Visit their website (see Resources) to learn more about credit scores.
  • How Do Home Values Affect Home Equity Loan Rates?

    The risk to a lender includes not only your credit worthiness as determined by your credit score, but it also depends on the value of the collateral that guarantees the loan. In this case, it is your home. As home values decrease, the collateral you have used could become worth less than the value of your home equity loan plus your existing mortgage. In that case, if you defaulted on the loan, the lender may not be able to collect the full value of the principal they loaned you and therefore take a loss on this loan. This increases the riskiness of a home equity loan and therefore increases the rate they must offer. As a result, if home values in your area are decreasing, you will need to pay a higher rate on a home equity loan than would someone with comparable credit in an area where home values were increasing.
  • How Does Someone Get a Low Home Equity Loan Rate?

    Shop around. Different lending institutions will have different rates for people with the same credit score. Lenders that have made loans that have defaulted may have less money available to lend and therefore be more risk averse, so they will charge a higher rate. Do your research and compare the loan rates of as many banks as you can. Also keep in mind that your credit is a major factor in determining if you qualify for a low home equity loan. Know your credit score, learn how to improve it and take those steps.
  • What Is the Difference Between a Home Equity Loan and a Home Equity Line of Credit?

    A home equity loan is generally a lump sum loan like a mortgage. A home equity line of credit (HELOC) works like a credit card allowing you to draw on a credit line given to you by a lender as you need it. Home equity loans are generally a fixed rate while a HELOC typically is a variable rate. As with all loans, read and understand all the loan terms contained in the loan documents before agreeing to the loan.
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