How to get the best home equity loan rate this August, according to experts
Today's high interest rate environment has made borrowing more expensive than many had grown accustomed to in recent years. After a series of hikes, the federal funds rate has remained at 5.33% for over a year, up nearly three percentage points from the 2.41% peak in 2019 and up 5% from the 0% rate during the pandemic.
While a few percentage points may not sound like much, they can make a big difference when you're taking out a loan — especially when it comes to long-term options like mortgages and home equity loans. For example, a 30-year, $150,000 home equity loan with a 9% interest rate would have a monthly payment that's about $275 higher than the same loan with an 11.49% interest rate. Over 30 years, you're looking at an estimated difference of over $98,600.
Fortunately, there are signs that Fed rate cuts could be on the horizon. The July statement from the Federal Reserve says the federal funds rate will remain unchanged for now, but notes progress toward the two percent inflation objective in recent months. And most economists forecast that the first Fed rate cut will occur in September. But what can you do if you want to tap into your home equity affordably in August?
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How to get the best home equity loan rate this August, experts say
Here are five steps experts recommend you take to get a competitive interest rate this month.
Compare multiple offers
Lenders vary when it comes to the interest rate ranges and eligibility requirements on their home equity loans. To find a competitive deal, you'll want to shop around, collect quotes and compare them side by side, experts say.
"Don't settle for the first offer. Compare rates from multiple lenders to find the best rates. Even if you need to pay a small application fee, getting a better rate can save you a lot over the long term," says Sean Lovison, CFP, CPA and founder of Purpose Built Financial Services.
If you're not sure where to start, a good place can be your current mortgage lender.
"I would recommend starting with your current lender who assisted you with your initial mortgage, your local bank or credit union, and a referral from friends or family," says Jeremy Schachter, branch manager at Fairway Independent Mortgage Corporation.
Learn the home equity loan rates you could qualify for here.
Negotiate the rate
Another tactic to keep in mind is negotiation. The initial rate a lender offers you isn't necessarily its final offer.
"Don't be afraid to negotiate and let the lenders know about your other offers, there is always wiggle room," says Lovison.
Consider a shorter loan term
The specifics of the loan you're requesting will also impact your interest rate, so if you want a lower rate, you may want to consider a shorter home equity loan term.
"A shorter lifespan of a loan will normally result in a lower interest rate," says Andrew Griffith, DBA, EA, CPA, CMA, CIA, CFE, CRMA, NTPI and fellow associate professor of accounting at Iona University.
That's because shorter loan terms reduce the time lenders wait to get their money back, which lowers their risk.
Lovison agrees and recommends that you don't plan to borrow longer than you need. That could mean opting for a 15- or 20-year home equity loan instead of a 30-year term, as long as the larger payments fit into your budget.
Boost your credit score
Your credit score will also play a large role in the interest rate you get. Lenders rely on credit scores to assess the likelihood that you'll repay the amount on time.
"A higher credit score will normally result in a lower interest rate," Griffith says.
Getting your credit score in the best shape possible before applying will help you land lower rates and better terms, experts say.
"While most factors that contribute to your score take a long time to improve, such as payment history, there are other factors that can be improved more quickly," Lovison says.
For example, Lovison recommends reducing your credit card balances to improve your credit utilization ratio while limiting hard inquiries.
"Creditors often view low credit utilization rates favorably. This is especially true when people are paying off their credit obligations in full every month," Griffith says.
Don't borrow more than necessary
Lastly, experts say you should only borrow the amount you need because lower loan amounts present less risk to lenders.
"Higher equity in your home often translates to lower interest rates. This is referred to as loan-to-value (LTV) and the less you borrow relative to your home's value, the better the rate. Don't borrow more than necessary," says Lovison.
Schachter says that the more equity you have left over after you take out a loan, the better.
The bottom line
While interest rates may be relatively elevated in comparison to the last 10 years, these tips can help you get the lowest rate on a home equity loan or line of credit in the current environment. Refinancing your home equity loan down the road could also be an option if rates drop significantly during your loan term.
