The number one way to get the best rate for anything is to have excellent credit. Excellent credit is composed of several things.
- Payment history
- Length of credit history
- Amount of outstanding debt to overall credit available
- Amount of outstanding debt to income
These aren't the only considerations that credit companies use, but they are perhaps the most obvious and easiest to improve.
That being said, if you already know your credit score, then what you are really trying to find out is how to get the best rate for your credit score.
- Shop!
- Shop!!
- Shop!!!
If you don't shop around, you'll never find out what others are offering. Sometimes what seems obvious to be the best isn't. Some lenders will give you a slightly lower rate but charge you more for fees and closing costs making the overall repayment of the loan and interest higher. So do the math.
Like a regular mortgage, a home equity loan often comes with a higher rate than a home equity line of credit (HELOC). It's similar to the difference between a fixed mortgage and an adjustable rate mortgage (ARM). Usually the fixed rate mortgage is slightly higher at the start, but the ARM could often end up being higher after a few years. A HELOC interest rate is usually a prime rate plus a couple of percentage points. It will vary from month to month, sometimes even changing more than once a month! A home equity loan usually has a fixed rate for the duration of the loan term. As usual with financial matters though, there are always variations.
When finding a lender, you used to be limited to fairly local lenders. These days, with the internet you can find all kinds of lenders online - in addition to your local banks, credit unions, and mortgage companies. So shop around! Lenders that don't usually do first mortgage loans sometimes will do second mortgage loans. And almost all first mortgage lenders will offer home equity loans.
Another key is to have the total debt in your house, first and second combined, less than the appraised value of your home. If your total debt goes over your appraised value, you can almost guarantee you are going to have a higher interest rate. Of course, sometimes you can find these kinds of loans offered everywhere and sometimes you can't find these kinds of loans at all! Regardless, it is better to have your total debt be less than your house is worth.
So to summarize, the best way to get the best home equity rate is to:
- Have excellent credit.
- Shop around!
Since we can't change our credit scores overnight, do your homework. Check banks, credit unions, mortgage companies and online lenders. And in the meantime, learn what you personally need to do to improve your credit score. Almost everyone, even those with a really good credit score, has room for improvement.
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