If you’re looking for the best home equity loan rates, you’re in good company. Home equity loans hold undeniable appeal for many homeowners. They’re a convenient way to unlock some cash by tapping the value built up in your home — money you otherwise won’t see unless you sell your home for a profit.
Though you can use a home equity loan for almost anything, they’re especially appropriate for home improvements. Many others use home equity loans to consolidate their debts.
But before you run to your bank and ask about the best home loans, you’ll want to make sure you understand how these loans work, their pros and cons, and whether you’re better off with a fixed-rate loan or a home equity line of credit (HELOC). We’ll also discuss shopping tips, including what to watch for with fees and how to make sure you’ll get the best rates.
How to Understand Home Equity Rates
The best home equity loan rates are constantly changing, so your first step is to find an easy way to search competitive rates in your area.
An online search tool like Lending Tree is a great place to start. Once you answer a few simple questions such as what your home is worth, what you owe on your mortgage, and how much you’d like to borrow, you can easily and directly compare several lenders’ offers and choose the best home equity loans for you. With a few options and clear expectations of what your loan will cost, it’s easier to make comparisons.
Current Rate Climate
In mid-January 2016, the national average interest rate for a $30,000 fixed-interest home equity loan was hovering a bit over 5%. The average interest rate for a $30,000 HELOC was about 5.2%. We scanned local rates in the area (Knoxville, Tenn.) and found fixed-interest loans as low as 4.25% and the best HELOC rates at 3.5 to 4%, assuming excellent credit.
Where will we go from here? Average rates on home equity loans have been trending downward since January 2016, when they were just under 5.8%. HELOC rates hit a low of 4.78% in February 2015 and have mostly been climbing since. The Federal Reserve’s recent rate hike (and potential future hikes) may pave the way for rising rates on both home equity loans and HELOCs this year, but it’s unlikely any rate jumps will be dramatic.
With all the uncertainty around rates, it becomes even more important to use an easy online tool to keep on top of the best home equity loan rates, so you’ll know when is the best time to pull the trigger. Using Lending Tree or a similar tool is your best bet.
Five Tips for Finding the Best Home Equity Loan Rates
Landing the best home loans and HELOC rates means doing your homework. It will require comparison shopping, fiscal discipline, and a keen eye for APR quirks and fees that can tip the scales in favor of one loan over another. Here are some tips for finding the best home equity loan rates:
#1: Shop around
It would be convenient to open a fixed-rate home equity loan or a HELOC with your existing mortgage lender. And it’s certainly worth checking with them — they may give you a good deal to keep your business. However, you certainly don’t want to skip comparison shopping with other lenders. Remember, a small difference in your APR can make a big difference in what you pay over the life of your loan.
One easy way to comparison shop is by using a rate-finding tool online. It will let you directly compare rates with lenders in your area. And don’t focus only on banks. Credit unions with lower overhead may offer lower rates — just be prepared for a potentially slower application process and fewer bells and whistles on your account.
#2: Solidify your finances
While having equity available in your home is certainly the main requirement for getting the best home loan, a couple of other factors will figure heavily into lenders’ decisions: your credit and your level of debt compared with your income.
Though your home is collateral for a home equity loan, your credit score still affects your rate. An excellent score will net you a low APR. An average score will net you a higher rate, and a low credit score could keep you from getting a home equity loan altogether.
According to myFICO, the national average APR on a $30,000 10-year home equity loan for borrowers with excellent credit (740 and above) is 5.63%, which means you’ll be paying $328 a month. If your credit is on the lower end of average, around 630, you could be paying a 9.95% APR and $396 a month. Credit lower than that may mean you’re shut out entirely.
Your lender will likely also look at your debt-to-income ratio. That’s the amount you have to spend on debt payments each month compared to your monthly income. Every lender will treat this number differently, but one expert says lenders want to see it around 40% or below.
#3: Keep an eye on interest rates
It’s fairly easy to compare APRs on fixed-rate home equity loans. As long as you’re looking at a loan for the same amount over the same term, you can make an apples-to-apples comparison to find the best home equity loan rates. If you want to do business with a particular lender but their loan has a higher APR, see whether they’ll lower it.
Be careful shopping for HELOCs. If you see very low rates, they still might not be the best HELOC rates in the long term. You’ll need to check to see whether the low rate is a “teaser.” The lender may advertise a low rate that applies only for a short introductory period, not unlike an introductory APR on a credit card. After the introductory period, your rate zooms up. Be sure you know what the non-introductory rate is when you’re shopping, too.
#4: Compare fees
Even the best home equity loan can come with a lot of fees, and you’ll want to investigate them before choosing a loan or lender. Be sure to ask for a full list of fees, which may include application fees, loan origination fees, home appraisal fees, title search fees, document preparation fees, and attorney fees. These fees may add up to as much as 6% of your loan.
Don’t forget to ask about potential fees after you close the loan, too, such as late-payment fees or prepayment fees. A prepayment fee is commonly a percentage of what you still owe or a certain number of months of interest. Either way, this can be a hefty number. Your lender may phase out this fee after a certain time period, such as five years.
HELOCs are typically less costly to obtain, but you may still pay application or appraisal fees. With HELOCs, you’ll want to pay more attention to fees that apply after you’ve been approved. Some lenders charge an annual fee up to about $75, an inactivity fee if you don’t use your HELOC during a specified time period, transaction fees, and a cancellation fee of as much as $500 if you close your HELOC when you sell or refinance your home.
Fees are negotiable. It never hurts to ask a lender if they can waive certain fees, especially if you can point to a competitor who does not charge them. The worst they can say is no, and then you can decide whether it’s worth giving them your business.
#5: Investigate fixed-rate HELOCs
If you wish you could have the predictability of a fixed-rate home equity loan but the flexibility of a HELOC, you may be in luck. Some lenders will allow you to borrow a chunk of money from your HELOC and lock in a fixed interest rate on that amount for a certain term. Once you pay off that amount, it’s added back to your HELOC and is available again at a variable interest rate.
Of course, the fixed-rate portion of your HELOC may have a higher APR than the variable APR on the non-fixed portion. Your payments will be higher on this portion not only because of the rate, but because you will be paying both interest and principal, just like a traditional home equity loan.
Home Equity Loans 101
Need a primer on home equity loans, their benefits and pitfalls, and the best home equity loan for you? Keep reading to decide whether tapping your home equity will be wise move.
What is a home equity loan?
Home equity loans let you use one of your biggest assets — your home — to help you borrow cash more easily. You’re using your home’s equity (the difference between what your home is worth and what you owe on it) as collateral to lessen the risk the lender takes on when they make the loan.
That means you can get a lower interest rate than you may be able to get on a credit card or an unsecured personal loan. (If you’re interested in unsecured loans, see our post on the Best Unsecured Loans to learn more and find reputable lenders.)
How much can I borrow?
Today, most lenders will calculate 80% of your home value, then subtract what you owe on your mortgage or any other home loans to figure out what you can borrow.
For example, if your home is worth $200,000, 80% of its value would be $160,000. If you have $100,000 left on your mortgage, your lender will subtract that from $160,000. That means you’ll likely be allowed to borrow a maximum of $60,000 for your home equity loan. (If you’re looking for a good deal on a primary mortgage, check out our guide to getting the Best Mortgage Rates.)
A decade ago, it was common for lenders to allow you to borrow as much as 125% of your home’s value minus your mortgage balance, but standards have tightened since the subprime mortgage crisis. Though that might keep your loan smaller than you’d like, it also cuts your risk of default by keeping you from borrowing more than you can repay.
Pros and cons of home equity loans
Home equity borrowing sounds great, and it certainly has perks. However, there are also some very real risks to consider, even with the best home equity loans. Here are some pros and cons:
- Low rates: Because your home is collateral, you won’t pay as much in interest as you would with an unsecured loan with no collateral. This also makes it easier to land a home equity loan with a reasonable rate than a personal loan or credit card if your credit isn’t top-notch.
- Tax benefits: If you itemize your deductions, you can deduct the interest you pay on the first $100,000 of your home equity loan.
- Access to a large sum: Depending on the amount of equity you have, you may be able to access more cash with a home equity loan than with other borrowing options, including credit cards or personal loans.
- Flexibility: Whether you need money for a big expense like home renovations or an unexpected financial emergency, you can usually use your home equity loan for any purpose.
- Your home is at risk: If you suddenly can’t repay your loan, your lender can take your house.
- You could go “underwater”: If your home’s value declines after tapping its equity, this may leave you owing more on your home than it’s actually worth. This is called being “underwater” or “upside down.” Since the 2008 subprime mortgage crisis left many homeowners underwater, lenders have tightened their standards, but they can’t eliminate this risk entirely.
- Closing costs and fees can be pricey: Some experts refer to home equity loans as a second mortgage. The cost of closing your loan can be expensive, up to 5% to 6% of your loan, just like a primary mortgage.
- It’s still debt: Low interest rates and large sums make home equity loans a tempting way to pay for things you may not truly need, but it’s not a wise idea to tap your equity for nonessential purchases or frivolous home improvements. You’re essentially taking a chunk of your net worth and converting it into debt. You’ll need the discipline to pay off the loan and keep your spending in check, too. Remember, home values can and do fluctuate. Prepare for this by not taking too large of an equity loan against your home.
Fixed-rate home equity loans vs. home equity lines of credit (HELOCs)
Most people who consider home equity loans must choose between a fixed-rate home equity loan and a home equity line of credit, or HELOC. While the best HELOC rates are almost always lower than the best home equity loan rates, that shouldn’t be your only consideration. Read on to figure out which kind of home loan will be your best bet.
Home equity loans
With a fixed-rate home equity loan, you get a single lump-sum payout. Because your interest rate is fixed, you’ll have the same payment every month for a set term, commonly five to 15 years. That makes fixed-rate home equity loans easier to budget for, which can appeal to many homeowners.
The interest is also tax-deductible up to $100,000 (possibly more — up to the value of your home — if you used the money only to improve or buy a home).
Unfortunately, with the fixed-rate loan, you will be on the hook for closing costs that are similar to what you paid on your mortgage. They may total up to 6% of your loan and will include things such as attorney fees, your home appraisal, a title search, and document preparation.
You may also pay a higher interest rate than with a HELOC since it’s locked in. Your payments will be higher because they’ll include both the principal of the loan and interest. And you won’t be able to access more money if you need it — your lump-sum payout is all you get, and you’ll need to allocate it wisely.
A HELOC functions much like a credit card. You have a borrowing limit and a specified “draw” period, typically 10 years, during which you can generally borrow whatever you want whenever you need it, making interest-only payments along the way. The draw period is followed by a repayment period, typically 15 years. During this period you can no longer borrow from your HELOC and must repay both principal and interest.
The flexibility of a credit line is the big pro with a HELOC. You can borrow money, pay it back, and borrow it again. You may also nab a pretty low introductory interest rate, and you only pay interest on what you borrow during your draw period, not your total line of credit. Though there are fees, they usually aren’t as steep as those associated with fixed-rate home equity loans. Interest is tax-deductible, too.
Of course, because HELOCs have variable interest rates, it’s harder to budget for payments. If you open a HELOC and interest rates rise significantly, you could be stuck paying more than you may have bargained for (there is typically a cap on your rate, but it might be fairly high).
Your lender also reserves the right to freeze your HELOC if your home’s value drops precipitously or they feel you’ve lost your ability to repay. And if you only paid interest during the draw period, you’ll be shelling out a lot more during the HELOC’s repayment period. The much larger payments can cause huge financial hardship if you don’t plan for them.
Should I choose a home equity loan or a HELOC?
It’s hard to say which one will be best for you, but here are some general guidelines:
Consider a home equity loan if:
- You need money for one large project or event. You will get the money you need from the fixed-rate loan in one lump sum.
- You don’t have the discipline to pay more than you have to — or resist using more money than you truly need — even when it’s best in the long run. A fixed-rate loan will give you only one-time access to cash, and your payment will be fixed. A HELOC, on the other hand, may allow tempting interest-only payments that could hurt you in the long run.
- You’re afraid interest rates will rise significantly. A fixed-rate loan will protect you from this risk.
Consider a HELOC if:
- You need access to cash for ongoing projects or expenses. You can take the money you need from your HELOC as you need it.
- You’ll only need small amounts you can pay back swiftly. You’ll probably pay less in interest with a HELOC.
- Interest rates are low and you’re willing to bet they’ll stay that way. A HELOC better lets you take advantage of low rates. But if you think rates will rise, use a home equity loan to lock in the low rate.
- You need a safety net, or are in the process of building an emergency fund. A HELOC is an inexpensive way to have a built-in safety net. You may never never need to touch it, but it’s nice to know it’s there if you don’t have other options.
Final Thoughts on Using Home Equity Loans
If you tap your home equity for a clear purpose and are confident you can repay the money without difficulty, a home equity loan might be a good choice for you. If you want money fast for a frivolous reason or can’t comfortably afford another payment, think twice.
Just like your primary mortgage, a home equity loan is serious business. For responsible borrowers, it can be a great tool. But if you don’t plan ahead, your home could be on the line.
If that’s a risk you can comfortably take, start your search for the best home equity loan rates with a comparison site like Lending Tree.