Written by Rene Bermudez | Edited by Crissinda Ponder | Updated December 3, 2024Home equity loan rates are relatively high right now, especially compared to the low rates we saw before the pandemic.
Home equity rates tend to fall when the Federal Reserve cuts the federal funds rate, which it did most recently on November 7th. The Fed has one more opportunity to make an additional rate cut this year and, if they do, we can expect home equity loan rates to fall further.
Senior economist |
“Home equity loan rates could see some declines, but they probably aren’t going to move down by the exact same amount as the Fed cuts its benchmark rate. In other words, would-be home equity loan borrowers might see some marginally lower rates this month, but they shouldn’t expect any major drops.” |
Every home equity offer comes with different loan terms and features. Of course you want a low interest rate, but don’t forget to evaluate the lender offering you that rate, too. Here are things to consider when shopping for a home equity loan lender:
→ Qualification requirements: Lenders can set their own requirements. If one lender is too strict, look for one with different requirements that better fit you.
→ Loan costs and fees: The lender you choose can affect your total costs and fees. Some costs are standard, but many are set by the lender.
→ Customer service: Choose a lender that offers services that work for you, like a brick-and-mortar network or digital-first capabilities.
There are many lenders to choose from, and each of them set their own home equity loan requirements. The approval guidelines are usually a bit more strict than traditional mortgages, so you should strive to:
Most home equity loans come with fixed interest rates, which means that you can enjoy consistent payments that won’t change over time. Because a home equity loan is paid out to you all at once, the amount of money you’re paying interest on never changes.
1. Your credit score
The lower your credit score, the better your rate will usually be. Most lenders will allow a 620 minimum score, but some set the bar even higher at 660 or 680. Get your free credit score on LendingTree Spring today.2. Your DTI ratio
Your debt-to-income (DTI) ratio measures how much your monthly debt load is compared to your gross monthly income. Home equity lenders typically allow a 43% maximum DTI ratio, but the lower the ratio is, the better your rate offers will be.3. Your LTV ratio
Your loan-to-value (LTV) ratio compares how much you’re borrowing to your home’s value. The typical maximum LTV ratio is 85%, though lenders offer better rates if you borrow less. But some lenders offer high-LTV home equity loans with LTVs of up to 100% if you’re willing to accept a higher rate.A home equity loan is a second mortgage that converts your home equity into cash. Home equity is the difference between how much your home is worth and the amount you owe on your outstanding mortgage balance.
When you get a home equity loan, you receive the money all at once and make fixed monthly payments to pay it off. You can use the cash from a home equity loan to make home improvements, pay down high-interest debt or cover any other expense you choose.
→ DTI ratio: 43% maximum
→ Credit score: 620 minimum
→ LTV ratio: 85% maximum
This is the standard LTV ratio maximum. However, some home equity lenders let you borrow up to 100% of your home’s value.
Yes, if the funds from the home equity loan are used for home improvements, you can deduct the interest from your taxable income. Learn more about how to get your home equity loan tax deductible.
The easiest way to figure out how much you can borrow with a home equity loan is to let our home equity loan calculator do the math for you. You’ll just need three pieces of information:
Learn more about how to calculate your home equity loan amount yourself.| Pros | Cons |
|---|---|
Lower interest rates: You’ll pay lower interest rates than you would with credit cards or personal loans. Fixed rates: Your payment will be the same each month because your rate doesn't change. Tax implications: You may be able to deduct home equity loan interest from your tax bill. One-time closing costs: Your closing costs will typically be on par with HELOC closing costs, but you won’t have any ongoing membership or inactivity fees. Very flexible: You can use the money for any purpose. | Second mortgage rates: You’ll pay a higher rate than with a HELOC or cash-out refinance. Tougher guidelines: You may need higher scores and lower debt to qualify than you would with a cash-out refinance. Reduced equity: You’ll lower the available equity in your home. Another monthly payment: You’ll have two monthly house payments. Collateral requirement: You could lose your home if you default on your payments. |
There are two main disadvantages to home equity loans:
1. A home equity loan ties new debt to your home.
This complicates your finances and puts your house at additional risk of foreclosure. If the worst happens and you can’t keep up with either your mortgage payments or your home equity loan payments, you could lose both the place you lay your head and your biggest asset all at once.
2. Home equity loans are a more expensive way to borrow money.
Other options that use your home as collateral can also save you money. However, if you find these options aren’t right for you, it can make sense to take on the heftier costs of a home equity loan.
Consumers sometimes confuse home equity loans with home equity lines of credit (HELOCs), but they work very differently. A HELOC is a line of credit that can be used like a credit card, and HELOC rates are almost always variable.
Unsure which is right for you? Read our comparison of home equity loans vs. HELOCs.A cash-out refinance gives you access to cash by replacing your existing mortgage with a larger one. It’s a first mortgage, so you can get lower interest rates than you could with second mortgages like home equity loans. A cash-out refi is also easier to qualify for.
Not sure which is right for you? Read our home equity loan vs. cash-out refinance comparison.If you prefer to leave your home equity alone, you may qualify for an unsecured personal loan. Rates on a personal loan are often higher than home equity products, but you won’t have to worry about the lender foreclosing on your home if you default on your payments.
Not sure which to choose? Read our comparison on home equity loans vs. personal loans.Let’s say you need to borrow $100,000 and you’re wondering what your best option is: a fixed-rate loan (like a home equity loan) or a variable-rate option.
A cash-out refinance is a common fixed-rate option and typically offers a lower rate than a home equity loan. However, in order to access this option you have to alter your first mortgage, since you’re refinancing it.
Takeaway: A home equity loan may be the better choice for someone who wants a fixed interest rate, but doesn’t want to touch their primary mortgage.
In a market with falling rates, you may be able to save by choosing a variable-rate loan, like a HELOC or adjustable-rate cash-out refinance. But if rates rise, variable-rate options can get more expensive over time and quickly overtake the (fixed) rate on a home equity loan.
Takeaway: A home equity loan may be a better choice for someone who wants stable payments or who’s borrowing in a market with rising interest rates.
