Home equity rates

Getting the best rate on a home equity loan requires credit score diligence and careful budgeting. But keep in mind that defaulting on a loan like this can lead to foreclosure, so only borrow what you need — even at a manageable rate.

Current home equity rates by lender

What’s the current average home equity rate?

Current interest rates on home equity loans range between 3.5% and 9.25%, with an average rate of 5.13% as of June 2020. The rate you’re offered depends largely on your credit score, income and the amount of equity you have in your home.

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Features	Loan types: Conventional, Refinance, Home Equity, HELOC, Jumbo, Reverse, FHA, VA, USDA Minimum credit score: 620 Minimum down payment: 3.5%

How can I get the best home equity rates?

Your rate will be a balance between the amount of equity you’ve built in your home and the details of your financial past — namely, your credit score. Consider the following when shopping around:

Choose between a lump sum or credit

There are two primary ways to borrow against your home’s equity. You can either take a lump sum loan in cash or opt for a home equity line of credit (HELOC) — a credit line with a spending limit equivalent to your home’s equity.

Here’s the difference between the two:

• Home equity loan. This involves borrowing a specific amount of cash at fixed interest rate, with a set amount of time to pay it off.
• HELOC. Withdraw money as you need it. There’s a cap for the total amount you can borrow and a variable interest rate.

While HELOC rates are typically lower to start, they fluctuate over time and can end up costing you more in the long run, depending on how long it takes you to pay off the loan.

Improve your credit

For the lowest interest rate possible, comb through your credit history beforehand to catch any red flags. Make sure your bill payments are up to date and check for errors that could give lenders reason to doubt your ability to pay back the loan.

Most lenders look for a credit score of at least 620, which falls within FICO’s “Fair” bucket. But if you can manage to get your score into “Good” territory or better, it could save you thousands in interest over the life of the loan.

Calculate your loan to value (LTV)

Your LTV is the difference between how much you owe on your home what it’s worth. Basically, it’s a numerical measure of your home’s equity. When underwriting a home equity loan, lenders use the LTV to determine the risk of granting you the amount you’ve requested. If a borrower’s LTV is too close to the total appraised value of the house, that’s seen as risky because there’s a higher chance of default.

An LTV of 80% or less generally gets you the best rates. To figure out your LTV, divide what’s left of your mortgage loan by the current market value of your house.

Compare your options

To find the best rate, start close to home. Check with the lender who did your original mortgage or ask family and friends for a recommendation. Keep in mind, however, that rates, fees and loan terms vary by lender, so take your time and get multiple quotes.

Only choose a lender that you trust. Communication and customer service can be just as important as low rates when it comes to the best home equity loan experience.

Bottom line

A home equity loan or HELOC can be a convenient way to fund a home improvement project or major life expense. But be sure to choose one that’s feasible for your finances — your home is on the line.

Compare home equity lenders to find the best choice for you.

Check some of our other reviews on home equity lenders

Frequently asked questions

• Is the interest paid on a HELOC or home equity loan tax-deductible?

  If you use the money to fund a home-related investment, then yes. But you can only deduct the interest on the first $700,000 you borrow.

• How long does my HELOC last?

  You can continue borrowing from a HELOC until the draw period expiration occurs.

  The draw period is different for everyone and is determined by the lender and amount you borrowed. Some last as long as 20 years. When the draw period expires, you’ll start making fixed payments on what you owe.

• What is my DTI?

  DTI stands for debt-to-income ratio. It’s a measure of how much you owe verses how much you make, and is another factor that lenders consider when assessing risk.

  To calculate yours, add up your monthly debt payments and divide it by the amount of money you make each month. And keep in mind that federal regulations cap DTI at 43% for a fixed-rate, fixed-term home equity loan.