How to Find the Best Rates on Home Equity Loans

By Steven Mitchell

  • Overview

    A home equity loan can offer you the freedom to use the built-up equity in your home to do any number of things. Most people use the funds for home improvements, to consolidate debt, to pay for education or, in some cases, to cover emergency expenses. To make this credit line as affordable as possible, you will want to take the time to find the best rates on home equity loans.
    • 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.
    • 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.

    • 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.
    • 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.
    • 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.
    • 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.
    • Skill: Easy
    • Ingredients:
    • Recent home appraisal
    • Most recent credit reports
    • Tip: Check your credit report at least 30 days prior to searching for a home equity loan to make sure there are no errors. An error on your credit report can be very costly and it will take some time to fix.
    • Warning:
    • Make sure you explore the avenue of a credit card instead of a home equity loan. In most cases a home equity loan will be your best option, but not always. A low interest rate credit card with reward points could possibly offer you more and without putting an additional lien on your home.

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