What is the Interest Rate for a Home Equity Loan?

If you’re considering taking out a home equity loan, you’re probably wondering what the interest rate will be. Read on to learn more about interest rates for home equity loans and how they are determined.

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Home Equity Loan Interest Rates

The interest rate for a home equity loan is usually lower than the interest rate for a credit card or personal loan. This is because the loan is secured by your home equity.

How Home Equity Loan Interest Rates Work

Home equity loan interest rates are either fixed or variable. Fixed rates stay the same for the life of the loan while variable rates can change over time. With a fixed-rate home equity loan, you’ll know what your monthly principal and interest payments will be for the life of the loan.Get a Fixed-Rate Loan with Discover Home Loans

With a variable rate home equity line of credit (HELOC), your monthly payments can go up or down as interest rates fluctuate. A HELOC may have a lower interest rate than a fixed-rate home equity loan, but as rates rise, so will your payments. Variable rates usually start lower than fixed rates but could increase over time. A HELOC also typically has adjustable rate periods where your interest rate will stay the same for a set period of time followed by periodic rate adjustments.

Factors That Affect Home Equity Loan Interest Rates

Interest rates on home equity loans vary depending on the type of loan, the amount you borrow and the lending institution. You can get a home equity loan for a fixed rate if you want to make equal monthly payments over a set period of time. Or, you might get an adjustable rate home equity line of credit (HELOC) that allows you to draw money as you need it up to your credit limit.

There are several factors that affect interest rates on home equity loans, including:
-Your credit score: Lenders often charge higher interest rates to borrowers with lower credit scores because they’re considered to be a higher risk. You can check your credit score for free with sites like Credit Karma or Credit Sesame.
-The type of loan: Home equity loans typically have lower interest rates than HELOCs because they’re considered to be less risky. With a home equity loan, you receive the entire amount of the loan in one lump sum and then make fixed monthly payments over the life of the loan. With a HELOC, you’re approved for a certain amount but only draw on the funds as needed, making minimum monthly payments until the final payment is due.
-The term length:Home equity loan terms are typically five to 15 years, while HELOC terms are typically five to 10 years. The longer the term length, the lower your interest rate will be.
-The lending institution: Some lenders offer special deals or discounted rates on home equity loans and lines of credit. Be sure to compare offers from multiple lenders before choosing one.

How to Get the Best Home Equity Loan Interest Rate

The interest rate for a home equity loan depends on several factors. Some of these factors include your credit score, the loan to value ratio, and the loan term. In this article, we will go over how to get the best home equity loan interest rate.

Improve Your Credit Score

The better your credit score, the more favorably you’ll be viewed by lenders and the more likely you are to get a lower interest rate on your home equity loan. If your score needs some improvement, here are some things you can do:

-Pay all of your bills on time, every time.

-Keep balances low on credit cards and other revolving credit accounts.

-Apply for and open new credit accounts only as needed.

-Avoid closing older, well-established credit accounts.

-Limit inquiries into your credit history.

Shop Around

Getting the best home equity loan interest rate starts with shopping around. Compare interest rates from several lenders, including banks, credit unions and online lenders.

Once you have a few rate quotes, compare the Annual Percentage Rates (APRs). The APR includes the interest rate plus any fees charged by the lender, and is a better indicator of the true cost of the loan.

Home equity loan interest rates can vary depending on your credit score, loan term and other factors. To get the best rate, shop around and compare offers from multiple lenders.

Consider a Fixed-Rate Loan

Most home equity loans are fixed-rate loans, meaning the interest rate is set when you take out the loan and doesn’t change during the life of the loan. The alternative to a fixed-rate loan is an adjustable-rate loan, or ARM, which has an initial low interest rate that can go up or down, depending on movements in financial markets.

Because home equity loans are secured by your home, they usually have lower interest rates than unsecured loans such as personal loans and credit cards. But unlike a first mortgage or a home equity line of credit, you only make payments on the amount you borrow from a home equity loan.

When to Refinance Your Home Equity Loan

When Interest Rates Are Low

Home equity loan Interest rates are typically lower than rates for other types of loans, such as credit cards and unsecured personal loans. This is because secured loans are backed by your home equity, which lenders view as a heightened risk for default.

Given this dynamic, home equity loan Interest rates tend to be much lower when the general Interest rate environment is favorable for borrowers. For example, if the Federal Reserve (Fed) is keeping short-term Interest rates low in an effort to spur economic growth, home equity loan Interest rates will likely be low as well.

When You Need to Consolidate Debt

If you have credit card debt or other types of debt with a higher interest rate, you may be able to save money by consolidating that debt into a home equity loan. This can help you pay off your debt faster and may even lower your monthly payments. Of course, this only makes sense if you have equity in your home and if you can get a loan with a lower interest rate than what you’re currently paying.

When You Have Improved Your Credit Score

If you originally obtained your home equity loan when your credit score was lower than it is now, you may be able to refinance to a lower interest rate. A lower interest rate could save you money every month on your payments, and over the life of the loan.