Home equity loans are a preferred type of loan because they combine two excellent benefits: low interest rates and excellent tax advantages. Home equity loan rates vary by bank and by borrower, but it is certain that you’ll get a lower rate from a home equity lender than you would from any other.
Home Equity Interest Rates
Home equity interest rates are set like most interest rates; they’re based on the prime rate. The Prime rate in the United States is much like the LIBOR rate in London, each rate is the rate at which banks agree to lend money to one another. When there is lots of money floating around and there are few borowers, banks are willing to loan money to eachother for lower interest amounts.
This low rate is then passed on to borrowers who pay just slightly more than the Prime rate or LIBOR rate if they have good credit. The result is an excellent interest rate for borrowed money, a happy bank, and an even happier customer.
Rates Are Low
There are two reasons why home equity loan rates are usually lower than other loans:
1) They’re low-risk – Because banks are lending money against the equity you have in your home, failure to pay back the loan means that you have to give up your home. The banks see this as a big advantage in that few people are going to skip a payment on a home equity loan if they know that a foreclosure will be waiting for them around the corner. Plus, even if the borrower does default, the bank can sell the home and get back the amount they lent against its value immediately! How is that for a win-win proposition?
2) They’re sometimes adjustable – Most home equity loan rates that you see advertised are for adjustable rate loans. Adjustable rate loans have lower interest rates because they can rise and fall with the market. Thus, banks carry less risk of losing money if they write a loan as an adjustable rate loan, and do not have to price in the cost of this risk in the interest. A fixed rate loan, which is far safer for the average borrower, is higher cost because the bank insures itself against the risk of rising rates, passing this cost onto the consumer.
Getting Great Rates
Borrowers who are willing to invest some time into getting a loan can get far better rates (and ultimately lower monthly payments) than someone else looking for the same, or similar, loan. These things are:
1) Scrub your credit report – Before applying for any loan, especially one that is tied to your home, you should always seek out your credit report for any errors. An error on your credit report could easily cost you several points in annual interest, and thousands of dollars in minimum payments.
2) Improve your home – Before you get approved for a home equity loan rate, the lender will want to inspect your home to determine its value. As is normally the case, a third-party inspector will evaluate what they think the home is worth. You can “aid” them in finding a higher home value by cleaning up around the home, improving its “curb appeal” and making small repairs and adjustments that would make it more attractive to a buyer. Remember, the higher the price tag the inspector puts on the home, the more equity you have to borrow, and the more safety a lender has in lending you the money.
3) Go fixed rate – A fixed rate loan does not immediately appear to be as good of a deal as an adjustable-rate loan, but if you plan to pay off the debt over several years then there is no better way to finance any loan. By opting for a fixed rate, you can always refinance for a lower rate should rates dip, but if they rise, you’ll still pay the same, low fixed rate. Never gamble with interest rates, as you have very little control over whether they rise or fall. It is truly a losing bet for most everyone.