According to data firm Black Knight, exploitable home equity is now at an all-time high, thanks to rising home prices. This leads some homeowners to consider a home equity loan, which allows you to borrow money based on the value of your home. These loans typically offer fixed interest rates that tend to be lower than credit card and personal loan rates. Indeed, some home equity rates are now hovering around 4%.
You usually get this money in a lump sum, and experts advise that home equity loans are best suited to pay for home improvements, debt consolidation, emergency expenses and business expenses, rather than discretionary items. like a vacation. This guide, from MarketWatch Picks, can help you decide if a home equity loan is right for you. And below, we asked experts about the best ways to get the lowest rates on home equity loans.
Increase your credit score
If your credit score doesn’t meet the minimum requirements (which are usually around 620), there are things you can do to get approved for a refinance. “First, you can look for a lender who has less stringent credit requirements. Just because one lender hasn’t approved your refinance doesn’t mean all other lenders will do the same,” says Jacob Channel, principal economics analyst at LendingTree. Just be aware that a low credit score will impact the interest rate you pay on the loan.
Even if you qualify for a home equity loan, it’s quite possible that increasing your credit score will earn you an even better interest rate (for the best rates, lenders may look for scores above 740) . To increase your credit score, make monthly payments on time and pay off debts to lower your credit utilization rate, advises Channel.
Make sure you have a low debt ratio
Your debt-to-equity ratio, or DTI, is simply your monthly debt payments (mortgage, credit card payments, car, student or personal loans, child support, etc.) divided by your gross monthly income. So if your monthly debt is $2,500 and your gross monthly income is $7,000, your DTI ratio is about 36% ($2,500/$7,000 = 0.357). DTI requirements vary among lenders, but they often look for a DTI of 43% or less.
Greg McBride, chief financial analyst at Bankrate, explains that because home equity loans are installment loans, where you borrow a set amount of money all at once and then repay the loan over a fixed number of payments, with a low debt ratio and sufficient income to meet the monthly payments is the key. Other important financial factors to consider when applying for a home equity loan include sufficient income, a reliable payment history, and good credit.
The more equity you have, the better
“The more equity you have, the better off you will be. Aim to keep at least a 20% untapped stake and even more can get you a better deal,” says McBride. To determine the equity in your home, subtract the amount you owe on all loans from the appraised value of the home.
Shop around for quotes from at least 3-5 lenders
“Most of them post their home loan rates on their websites. You need to know the approximate value of your home, how much you want to borrow, and how many years you want to pay back,” says Holden Lewis, real estate and mortgage expert at NerdWallet. Don’t overlook your current bank either, having an existing account there can mean you’re eligible for promotions or discounts.
“Closing fees and costs can vary between lenders, so it’s important to compare annual percentage rates (APRs) and one-time fees and costs side-by-side,” says Paul Appleton, head of consumer loans at Union Bank. Often, home equity loan closing costs include origination fees, appraisal fees, credit report fees, insurance fees, application and deposit fees, title fees and taxes, which typically range between 2% and 5% of the total loan amount, according to LendingTree.
Choose a shorter term
Denny Ceizyk, senior writer at LendingTree, says the same factors that impact HELOCs affect home equity loans, although home equity lenders may set the bar slightly lower for credit scores, especially if you have more equity in your home. “You are likely to get a lower rate if you choose a shorter term loan, terms for home equity loans range from five to 15 years, although some home equity lenders offer terms of up to 30 years “, explains Ceizyk.
Learn about other types of loans
If a home equity loan costs more than you are willing to spend, it might be worth considering a home equity line of credit (HELOC) or personal loan, depending on how much you need to borrow and what you need. use. the money for.