According to data firm Black Knight, usable home value is now at a record high, thanks to rising home prices. That’s leading some homeowners to consider a home equity loan, which allows you to borrow money against the value of your home. These loans generally offer fixed interest rates that tend to be lower than credit card and personal loan rates. Of course, some home equity rates now hover around 4%.
You usually get this money in a lump sum, and experts advise that home equity loans are better suited to paying for home improvements, debt consolidation, emergency expenses, and business expenses, rather than discretionary items like a holidays. This guide, from MarketWatch Picks, can help you decide if a home equity loan is right for you. And then we asked the experts about the best ways to get the lowest rates on home equity loans.
Get your credit score
If your credit score doesn’t meet the minimum requirements (which is usually around 620), there are a few things you can do to get approved for a refinance. “First, you can find a lender that 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, senior economic analyst at LendingTree. Just keep in mind that a low credit score will affect the interest rate you pay on the loan.
Even if you qualify for a home equity loan, it’s quite possible that raising your credit score will get you an even better interest rate (for the best rates, lenders may look for scores above 740). To boost your credit score, make monthly payments on time and pay down your debts to lower your credit utilization ratio, advises Channel.
Make sure you have a low debt-to-income ratio
Your debt-to-income ratio, or DTI, is simply your monthly debt payments (mortgage, credit card payments, auto, student or personal loans, child support, etc.) divided by your monthly gross income. So, if your monthly debt is $2,500 and your monthly gross income is $7,000, your DTI ratio equals approximately 36% ($2,500/$7,000 = .357). DTI requirements vary by lender, but often look for a DTI of 43% or less.
Greg McBride, chief financial analyst at Bankrate, says that because home equity loans are installment loans, in which you borrow a fixed amount of money all at once and then pay off the loan in a fixed number of payments, with a low debt ratio and enough income to take on the monthly payments is key. Other important financial factors to consider when applying for a home equity loan include sufficient income, reliable payment history, and good credit.
The more capital you have, the better
“The more capital you have, the better off you are. Try to retain at least a 20% untapped equity stake and even more can get you a better deal,” says McBride. To figure out how much equity you have in your home, subtract the amount you owe on all loans from the home’s appraised value.
Shop around to get quotes from at least 3-5 lenders
“Most of them post their home equity loan rates on their websites. You need to know the approximate value of your house, how much you want to borrow and in how many years you want to pay it off,” says Holden Lewis, housing and mortgage expert at NerdWallet. Don’t neglect your current bank either, having an account there may mean you are eligible for promotions or discounts.
“Fees and closing costs can vary between lenders, so it’s important to do a side-by-side comparison of annual percentage rates (APRs) as well as one-time fees and costs,” says Paul Appleton, chief of consumer loans at Union Bank. Closing costs on home equity loans often consist of origination fees, an appraisal fee, a credit report fee, insurance costs, document and filing fees, title fees, and taxes, which typically range from between 2% and 5% of the total amount of the loan. according to LendingTree.
Choose a shorter term
Denny Ceizyk, senior writer at LendingTree, says the same factors that affect HELOCs affect home equity loans, though home equity lenders may set the bar a little lower for credit scores, especially if you have more equity in your home. his house. “You’ll likely get a lower rate if you choose a shorter term—home equity loan terms range from five to 15 years, although some home equity lenders offer terms as long as 30 years,” says Ceizyk.
Look for other types of loans
If a home equity loan costs more than you’re willing to spend, it might be worth considering a home equity line of credit (HELOC) or a personal loan, depending on how much you need to borrow and whatever you are using. money for.