How to Get the Best Home Equity Loan for You

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By MarkPeters

How to Get the Best Home Equity Loan for You

Home equity loans, also known as second mortgages, allow you to borrow against your home’s property value if the mortgage balance is higher than the mortgage balance. These loans typically have fixed rates of interest and are paid in one lump sum.

A home equity loan may be an option if you wish to make home improvements that will increase the value of your home. You might also consider a loan to cover large expenses that are not possible to pay in other ways. For example, education costs.

Interest rates for home equity loans tend to be lower than personal loans or credit cards rates.

You should not convert your home equity (the value of your home minus the loan) into cash just because it is possible. If you don’t have the funds to repay the second or first loan, your home is collateral. Therefore, if you do decide to cash in your home equity, you could end up losing it. Make sure your home equity is being used only for legitimate purposes, such as to protect or grow your wealth. This is what you need to know if you’re looking to borrow money on your home equity.

Get the best rate on a home equity loan

Two important factors are considered by lenders when determining how much interest you will pay for a home equity loan: credit score and existing debt. Do your research, compare offers, and improve the factors below to get the best home equity loan interest rate.

Polish your credit score

You can get the lowest rate on a home equity loan by reviewing your credit reports. You should pay off any outstanding bills and maxed out credit cards before you apply for a home-equity loan.

A lower interest rate and savings could be yours if you raise your credit score from good to outstanding or fair to good. It is important to know your credit score before you can compare home equity rate rates.

Calculate your LTV

You can borrow more if you have equity, but a lender won’t lend as much if your loan-to-value ratio (or LTV) is less than 80%.

Click the button to find out how much you house is worth. To calculate the equity you will be able to borrow, enter that value into our loan calculator.

Know your debt-to-income ratio

You may be approved for a home-equity loan if you have a good credit score. The interest rate will be affected by your debt-to income ratio. This is how much you owe divided with what you earn. You can lower your DTI by paying down debt and avoiding new loans. NerdWallet DTI calculator is a great tool to help you calculate your ratio.

First, contact your bank or current lender to compare rates.

Check to see if your bank, current lender or credit union offers home-equity products when comparing home equity loan rate comparisons. If you have multiple lines of credit or accounts, some financial institutions offer a discount on your rate. It may also be easier to work with the same lender.

Next, compare their offers to home equity loan rates offered by at most two other lenders. Don’t limit yourself to rates. Consider special promotions, fees, and the annual percent rate (or APR) to get a true idea of the loan’s cost.

You might consider other alternatives to home equity loan

Home equity loans may seem obvious due to their one-time payouts and fixed rates. However, flexible draw periods can be provided by home equity lines. Lenders also offer HELOCs that have variable repayment rates. This can make them more expensive as rates rise.

Cash-out refinances replace your existing mortgage with one larger that returns the difference in cash. However, it is possible to end up with an interest rate that is higher.

Personal loans for home renovation may be possible depending on how much you need and how long it takes. They are based on credit scores and payments history, not the equity in your house.