Home equity loans represent an excellent option for extracting the value locked in your home.
You should be aware that the interest rates on these loans are higher than mortgages. They present the lender with enhanced risk because if you enter foreclosure, the primary mortgage will always be paid off first. In many cases, this leaves the home equity loan provider with nothing.
In this guide, we take a look at five tactics for getting the lowest rates on your home equity loan.
1. Improve Your Credit Score
Did you know that 13% of Americans have no idea what their credit score is? Due to the risks involved, your credit score is the biggest factor in the home equity loan application process.
Elevating your credit score above the psychological barriers of 600, 700, and 800 can lead to thousands of dollars in savings.
See Also: Hacks For Increasing Your Credit Score
2. Consider Your LTV Ratio
The loan-to-value (LTV) ratio will have a significant impact on the rates offered by a lender. Asking for a loan with a lower LTV ratio will always come with lower rates.
If you ask for a credit union home equity loan of $100,000 on a $200,000 house, you are going to receive higher rates than if you asked for a $100,000 loan on a $500,000 house, for example.
3. Opt for the Lender You Know
The financial industry is highly competitive, and loyalty is hard to come by. Lenders will often offer better rates to applicants who already have a history with them.
If you have successfully repaid your loans in the past, or you hold an existing mortgage with them, they may reward you with lower rates.
This is not a policy every lender has, but it is becoming increasingly common.
4. Consider an Alternative Type of Loan
Most people opt for a home equity loan because it provides a lump sum with a fixed interest rate. However, it is always worth asking for rates on home equity lines of credit or personal loans.
Compare the interest rates and the terms. You may find that a home equity line of credit, for example, offers more favorable terms.
5. Shop Around
Rates on home equity loans differ wildly across different states and different lenders. For example, you may pay as much as 7% in Texas, whereas in Maine the same loan has an average rate of 4.8%.
These are just averages and rates within states may have a range of between two and three percent. It is well worth your time to shop around and see what rates are available. Do not accept the first offer on the table.
Taking the time to speak to multiple lenders can save you thousands of dollars in the long-term.
Home equity loans are just one way of extracting the equity built up in your home. You will need to meet the minimum monthly repayments of your home equity loan and your mortgage at the same time, however.
Check your budget and ensure you can service both loans or you could find yourself in financial trouble.