5 simple ways to get the best home equity loan rate right now

When it comes to financing major expenses or paying for home improvement projects, homeowners have a unique borrowing tool to consider: a home equity loan. With a home equity loan, you're borrowing money from the equity you've built in your home — and the average homeowner has a lot of equity to tap into right now. The average homeowner had about $200,000 in tappable home equity as of late 2023.

And, because home equity loans are secured by collateral — your home — you can typically borrow money at a much lower rate than you'd get with another type of lending product, like a credit card or a personal loan. In turn, a home equity loan can be a powerful, and affordable, tool when you need to borrow money. 

As with any type of lending product, though, it's important to secure the best home equity loan rate possible, as even a fraction of a percent can make a significant difference in the amount of interest you pay over the life of your loan. The good news is that there are a few simple ways you can get the most favorable home equity loan rates right now.

Explore your top home equity loan options here.

5 simple ways to get the best home equity loan rate right now

If you want to borrow against your home equity at the best rate possible, the following strategies could come in handy:

Understand your credit score

Your credit score plays a pivotal role in determining the interest rates you'll be offered on your home equity loan — or any other lending product you consider. So before applying for a home equity loan, obtain a copy of your credit report from major credit bureaus. Scrutinize the report for any errors and take steps to rectify inaccuracies if you find them. 

While there are numerous factors considered by lenders during the application process, a higher credit score often translates to being offered lower interest rates. So, focus on improving your creditworthiness by paying bills on time, reducing outstanding debts and maintaining a healthy credit utilization ratio.

Find out the home equity loan rates you qualify for here.

Shop around and negotiate

Not all lenders will offer the same home equity loan rates and shopping around is crucial for securing the best deal right now. One good place to start is by approaching traditional banks, credit unions and online lenders to find the different rates you qualify for. 

As you obtain quotes from multiple sources, don't be afraid to negotiate. Lenders may be willing to adjust their rates to win your business — especially if you have a lower rate offer from another lender. But as you compare lenders, be sure to consider not only the interest rates but also the fees associated with the home equity loan, as these can significantly impact the overall cost.

Strengthen your loan application

Presenting a strong loan application can also enhance your chances of securing the best home equity loan rates. During the borrowing process, lenders assess various factors, including your credit score, income, employment stability and debt-to-income ratio. 

So, it can benefit you to boost your application by providing thorough documentation of your financial standing, employment history and a clear outline of how you intend to use the funds. Demonstrating a strong financial profile makes you a more attractive borrower, potentially leading to better loan terms — including better rates on your home equity loan.

Optimize your loan-to-value ratio

The loan-to-value (LTV) ratio for your home is a crucial factor that influences the home equity loan rates you're offered. The LTV is calculated by dividing the loan amount by the appraised value of your home. Ultimately, the lower the LTV, the more favorable your interest rates are likely to be. 

To optimize your LTV ratio, consider paying down your mortgage if possible or increasing your home's appraised value through renovations. A lower LTV not only improves your eligibility for a home equity loan but can also result in being offered lower interest rates.

Consider a variable-rate option

While home equity loans are typically fixed-rate loans, offering payment and rate stability, there is a possibility of interest rates dropping later this year. So, it could make more sense to consider a home equity line of credit (HELOC) in addition to a home equity loan. 

Opting for a HELOC means you're getting a variable-rate loan. With a variable rate, you typically start at a lower interest rate than you would with a fixed-rate loan. This type of loan may also provide flexibility and potential cost savings if rates decrease. 

Note, though, that variable-rate loans are subject to market fluctuations, which could be advantageous if you anticipate a favorable interest rate environment in the coming months. But if rates increase, the rate on your loan would also go up. So while this alternative is worth considering, make sure you do your research beforehand and fully understand the potential risks.

The bottom line

Securing the best home equity loan rates requires a combination of financial preparedness, research and strategic decision-making. By understanding your credit score, shopping around for lenders, strengthening your loan application, optimizing your loan-to-value ratio and considering a variable-rate option, you can increase your chances of obtaining a home equity loan with favorable terms. As you weigh your options, though, just be sure to take the time to evaluate your specific needs and financial goals, ensuring that the home equity loan you choose aligns with your overall financial strategy.