How to Determine Home Equity Loan Rates

If you're carrying large credit card balances or have other high-interest debt and own your own home, you may have considered a home-equity line of credit, or HELOC. American homeowners who've built up equity in their home may have the option of taking out a loan secured by that equity. The interest rate for a HELOC is typically lower than for other lending products. However, the rate you'll pay generally depends on your personal credit and financial history, how much you borrow, and your local market.^{[1]XResearch source}

Part 1

Part 1 of 3:

Analyzing Your Credit and Income History

1
Check your credit score. Generally, you'll need a credit score of at least 620 to qualify for a HELOC. The higher your score is, the better the rates you'll be offered. You may still be able to get a HELOC with a lower score, but the interest rate will be much higher. If you want to use the HELOC to consolidate debts, you may not come out ahead.^{[2]XResearch source}
- You are entitled to one free credit report every year under federal law. To get your free report, go to annualcreditreport.com or call 1-877-322-8228.^{[3]XTrustworthy SourceFederal Trade CommissionWebsite with up-to-date information for consumers from the Federal Trade CommissonGo to source}
- Many major credit card companies provide free access to your FICO score, as well as tools to help you manage your debt and improve your score.
- You might also want to sign up for one of the free credit reporting services, such as Credit Karma or Credit Sesame, that will allow you to regularly monitor your credit score. While these services don't provide access to your FICO score, the scores they do provide are close enough for you to plan and monitor your credit.
2
Total your outstanding debts. To qualify for a HELOC, you typically need a debt-to-income ratio in the low 40s. This means that the total amount of money you owe is around 40 percent of your annual income (or less).^{[4]XResearch source}
- To total your outstanding debts, look at your most recent account statements for credit cards and other loans. You may also be able to get this information from your credit report. However, if you use your credit report, check the date your balance was last reported and make sure it's within the last 30 days.
- If you owe more than 40 percent of your annual income, you may want to think about paying down some of your debt before you apply for a HELOC. Start with the highest-rate debt first, and make more than the minimum payment until your debt-to-income ratio is improved.
3
Evaluate credit reports from all 3 major credit bureaus. Lenders offering HELOCs may review your credit report from Equifax, Experian, and TransUnion. Even if you got your free credit report from one of the bureaus, you should also order reports from the other two.^{[5]XTrustworthy SourceFederal Trade CommissionWebsite with up-to-date information for consumers from the Federal Trade CommissonGo to source}
- Compare the 3 reports and make a note of differences. Some creditors may not report to all 3 bureaus, so there may be discrepancies. One report also may contain inaccurate or out-of-date information.
4
Repair any errors on your credit report. When you review your credit reports, you may find entries or other information that are incorrect. Report these errors to the credit bureau that issued the report to get them corrected.^{[6]XTrustworthy SourceFederal Trade CommissionWebsite with up-to-date information for consumers from the Federal Trade CommissonGo to source}
- If the same error appears on more than one credit report, you must contact each of the bureaus separately.
- For some errors, it's easier to have the error corrected by contacting the creditor that reported the information, rather than the credit bureau. This would be the case if, for example, you had an active account with the creditor who reported the mistaken information.
- There are companies that will repair errors on your credit report for a fee. This fee can amount to hundreds if not thousands of dollars. However, while these companies may save you some time, they do not do anything that you can't do for yourself for free.
5
Create a household budget. If you don't already have one, build a budget before you apply for a HELOC. You need to know how much of a monthly payment you can afford before you take on more debt. Your budget may also determine how much money you can afford to borrow.^{[7]XResearch source}
- A budget is also essential if you have goals you need to meet before you can apply for a HELOC. For example, if you need to pay down your debts before you'll qualify for the best rates, your budget will help you determine how much additional money you can pay towards your debts each month.
- There are a number of free apps and websites, such as Mint or Wally, that can help you create and maintain a household budget.
Advertisement

Part 2

Part 2 of 3:

Deciding How Much to Borrow

1
Get your home appraised. While online home value estimators can give you an approximate idea of your home's value, only a professional appraisal will tell you what your home is truly worth. You likely want an appraisal before you apply for a HELOC, especially if you haven't gotten one in several years.^{[8]XResearch source}
- Once you know the value of your home, you'll be better able to assess how much equity you've built up. The result from an online calculator or other estimator likely won't be accepted by lenders for the purposes of a HELOC.
2
Find out how much you still owe on your mortgage. Check your most recent mortgage statement to find out what the balance is. If you have an online account with your mortgage company, you may also be able to get this information there.^{[9]XResearch source}
- You want the total amount you owe, not the payoff amount, which may be different. A lender assessing your mortgage for the purposes of a HELOC will assume that your mortgage will be paid off by the end of the term specified, not earlier.
3
Calculate your total home equity. The difference between your home's value and the amount you still owe on your mortgage is the equity you have in your home. Most home equity lenders will allow you to access between 80 and 85 percent of your equity.^{[10]XResearch source}
- For example, if you have a $500,000 home and currently owe $300,000 on your mortgage, that means you have $200,000 in equity in your home. If you got a HELOC for 80 percent of your equity, your HELOC would be $160,000.
4
Decide how much money you need to meet your goals. Look at the reasons you want a HELOC, and figure out how much you'll need. If the amount you need is less than 80 to 85 percent of the equity you've built in your home, a HELOC may be the right choice for you.^{[11]XResearch source}
- Generally, lenders will offer lower rates if you borrow larger amounts. Smaller amounts approaching the lender's minimum will typically have the highest rates.
- Keep in mind that you don't have to use all the money in your HELOC immediately, or even at all. You can open the line of credit and only take out the amount you need. It may make sense to take out more than you need if it would result in a substantially lower rate.
5
Look at minimum and maximum loan amounts available. Lenders typically don't offer HELOCs for relatively small amounts of money. If you need less than $10,000, or if you don't have a lot of equity in your home, you may want to consider refinancing rather than getting a HELOC.^{[12]XResearch source}
- Most lenders also have a maximum amount they'll lend. This differs from the amount of equity your have in your home. For example, Discover offers HELOCs for between $35,000 and $150,000. If you have $300,000 in equity and wanted a $200,000 HELOC, you would need to find a lender who offered HELOCs that large.
Advertisement

Part 3

Part 3 of 3:

Evaluating the Local Market

1
Research average rates in your state and county. Home equity loan rates vary depending on the market where your home is located. You can research online to learn what the average rates are in your area. Rates depend on a number of factors, including the relative demand for real estate and taxes or fees charged by your state or local government.^{[13]XResearch source}
- Finance apps and websites, such as Nerd Wallet or Quicken, have tools available for you to research average rates in your area. Most of these tools are available for free, although you may have to sign up for a free account.
2
Use an online home equity loan calculator. Many banks and financial websites offer home equity loan calculators that can help you determine the average rate you can expect for a home equity loan in your area. The same lender may offer varied rates depending on where your home is located and the general real estate market there.^{[14]XResearch source}
- Online calculators will only give you a general idea of the rate you might be offered. However, they can still be useful planning tools. Just keep in mind that there's no guarantee you'll get the rate the calculator finds.
3
Talk to several lenders in your area. Rates can vary significantly among lenders. Get at least 3 estimates, so you can choose the lowest rate. Try a mix of larger and smaller lenders, as well as the bank or credit union you currently use.^{[15]XResearch source}
- If you have an established relationship with a lender, you may be eligible for a better rate. For example, if you got your mortgage from the same bank where you have a checking and savings account, you might consider going there for a HELOC.
- The interest rate isn't the only cost to consider. Different lenders may charge additional fees or have other requirements. For example, you may be required to open an account with the bank before you can get a HELOC.
Advertisement

Expert Q&A

Search

Add New Question

Ask a Question

200 characters left

Include your email address to get a message when this question is answered.

Submit

Warnings

This article primarily deals with determining home equity loan rates for a home equity loan in the United States. Loan rates and types of loans available may differ if you live in another country. Speak to a financial advisor near you for more information.
Thanks
Helpful0 Not Helpful0