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Step 1
Check your loan-to-value ratio. This ratio is the principle balance remaining on your home mortgage compared to the most recent appraised value of your home. Most lenders will not offer you a line of credit on your home unless your loan-to-value ratio is less than 90 percent and the available line of credit will be determined based upon this ratio.
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Step 2
Pay close attention to your credit score and credit report. Your credit history will be a major contributing factor in the interest rates offered to you by the home equity lenders. The best credit scores get the best interest rates. You should always check all three of your credit reports before shopping for any sort of loan.
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Step 3
Shop around as much as possible to get the best rates on a home equity loan. Include all available options such as banks, credit unions and brokers. Your current home mortgage lender may be the best place to start but may not be your best option. If you are a member of a credit union, you may be able to get a very good interest rate from them. The more you shop around, the better your chances of getting the interest rate you desire.
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Step 4
Decide on variable vs. fixed rates for the lowest cost. A variable interest rate will move up and down as interest rates fluctuate, whereas a fixed rate will stay the same over the life of the loan. A variable rate gives you the chance of getting a lower rate in the future, but also comes with the risk of a higher rate. With a fixed rate, you know what you are getting. In turbulent economic times, a variable rate may be too chaotic and could end up costing you more than you bargained for.
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Step 5
Look for unneccesary fees and costs. To obtain a home equity loan, there are lenders who will not charge you the fees normally associated with a standard mortgage. If you can find a reliable lender that will not charge you closing costs, and will also not nickle and dime you with annual fees, inactivity fees, check fees or prepayment penalties, you can save thousands of dollars. An application fee and the cost for the appraisal of your home will probably have to be paid.
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Step 6
Pay attention to the repayment structure. With a home equity line of credit, you may have a monthly minimum payment during the life of the line but, once the draw period has expired, the total of the amount borrowed will be due. Some lenders will allow you to pay on an amortization schedule, while others will demand a balloon payment. A balloon payment can be devastating if it comes at the wrong time. It should probably be avoided, even if it gives you a cheaper rate.
