Low Rate Home Equity Loan

There are several things that a bank looks at when it comes to determining the rate (usually the Annual Percentage Rate or APR) of a home equity loan. Probably the most important of these is your credit history. Banks need to know that you are capable of paying back what they lend you. There are things that you can and should do to get a low rate home equity loan and there are things that you can ask the bank to do as well like locking-in interest rates and points and making down payments.

Bettering your Credit Report and Score
These are the main things that a bank looks at before lending anything. If you have a poor credit history, your interest rates will always be higher. One of the best ways to improve your credit score is to pay down the balances on your credit cards by at least 30%. Simply by creating a gap between the amount you owe and the credit cards limit, you can improve your credit quite a bit. If you can, pay off some of your debt. Most credit reports have inaccurate information and correcting that information may also improve your credit.

Lock-In Interest Rates and Points
Most loan companies offer the option of buying down your interest rates and payments with points. Points usually refer to 1% of the amount borrowed. Let’s say you are borrowing $100,000, one point would cost $1,000. Now, let’s say that the bank is offering an APR of 6%. Buying 1 point could reduce the APR to 5% and you may be able to save $100 on your monthly payments. This is only an example and points are much more complicated than that, so you will need to ask your lender what they can specifically offer you. Once you have points figured out and you have an interest rate you are happy with and a monthly payment that you can afford, you can “lock-in” those things which essentially means that for a specified period of time during the loans duration (like 5 years out of a 15 year mortgage) your rate and installment payment will not change. After the specified period you’ll have to be re-evaluated.

Down Payments and Paying Settlement Costs Upfront
If you are planning on making a down payment to reduce your interest rate, you may want to ask your lender if they have a Federal Housing Administration (FHA) Loan. These loans are backed by the federal government and only apply to a specific set of homes but if you qualify you may be able to get a lower interest rate and down payment.

When negotiating with your lender, if you have some money on hand (that hopefully you’ve been saving), you may want to see about reducing your interest rate by offering to pay settlement costs upfront. Certain things that you can cover include application fees, appraisal and home inspection fees, loan origination fee, administrative fees, prepaid interest, private mortgage insurance, insurance premiums for FHA, VA (Veterans Administration) or RHS (Rural Housing Service) guarantee fees, home owner’s insurance, escrow (a portion of the payments that you make is set aside by the bank to pay property taxes), survey costs, title research costs, and state and local taxes.

Points, paying settlement costs and making a down payment are all good ways to get a low rate home equity loan. However, you may be able to find more ways to get the lowest rate by shopping around, getting banks to compete for your business, reducing the loan duration and taking advantage of your time with an agent by asking what the lender can do to lower your costs.