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Home equity has hit a record high. 6 ways to get the lowest rate on a home equity loan now

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Alisa Wolfson

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According to data firm Black Knight, tappable home equity is now at a record high, thanks to rising home prices. That’s leading some homeowners to consider a home equity loan, which allows you to borrow money against your home’s value. These loans typically offer fixed interest rates that tend to be lower than credit card and personal loan rates. Indeed, some home equity rates now hover around 4% .  You usually get this money in a lump sum, and experts advise that home equity loans are best suited to pay for home improvements, debt consolidation, emergency expenses and business expenses, rather than discretionary items like a vacation. This guide , from MarketWatch Picks, can help you decide if a home equity loan is right for you. And below, we asked experts for the top ways to go about getting the lowest rates on home equity loans. 

Get your credit score up

If your credit score doesn’t meet the minimum requirements (which is usually around 620), there are a few things you can do to get approved for a refinance. “First, you can look for a lender that has less stringent credit requirements. Just because one lender didn’t approve your refinance doesn’t mean every other lender will do the same,” says Jacob Channel, senior economic analyst at LendingTree. Just beware that a low credit score will impact the interest rate you pay on the loan.

Even if you do qualify for a home equity loan, it’s highly possible that boosting your credit score will yield you an even better interest rate (for the best rates lenders may look for scores upwards of 740). To boost your credit score, make monthly payments on time and pay down debt to reduce your credit utilization ratio, advises Channel. 

Make sure you have a low debt-to-income ratio

Your debt-to-income ratio, or DTI, is simply your monthly debt payments (mortgage; credit card payments; auto, student or personal loans; child support, etc.) divided by your gross monthly income. So, if your monthly debt equals $2,500 and your gross monthly income is $7,000, your DTI ratio equals about 36% ($2,500/$7,000=0.357). DTI requirements vary by lender, but they often look for a 43% or lower DTI. Greg McBride, chief financial analyst at Bankrate, says because home equity loans are installment loans, where you borrow a set amount of money all at once and then repay the loan over a fixed number of payments, having a low debt ratio and sufficient income to take on the monthly payments is key. Other important financial factors to consider when applying for a home equity loan include having sufficient income, a reliable payment history and good credit.

The more equity you have, the better

“The more equity you have, the better off you’ll be. Aim to retain at least an untapped equity stake of 20% and even more may net you a better deal,” says McBride. To figure out how much equity you have in your home, subtract the amount you owe on all loans from the appraised value of them home. 

Shop around to get quotes from at least 3-5 lenders

“Most of them post their home equity loan rates on their websites. You need to know your home’s approximate value, how much you want to borrow and how many years you want to pay it off,” says Holden Lewis, home and mortgage expert at NerdWallet. Don’t neglect your current bank either, having an existing account there might mean you’re eligible for promotions or discounts.

“Fees and closing costs can vary between lenders so it’s important to do side-by-side comparison of annual percentage rates (APRs) as well as fees and one-time costs,” says Paul Appleton, head of consumer lending at Union Bank. Often, closing costs for home equity loans consist of origination fees, an appraisal fee, a credit report fee, insurance costs, document and filing fees, title fees and taxes, which typically range between 2% and 5% of the total loan amount, according to LendingTree.

Choose a shorter term

Denny Ceizyk, senior staff writer at LendingTree, says the same factors that impact HELOCs affect home equity loans, although home equity lenders may set the bar slightly lower for credit scores, particularly if you have more equity in your home. “You’re likely to get a lower rate if you choose a shorter term, home equity loan terms range from five to 15-years, although some home equity lenders offer terms as long as 30 years,” says Ceizyk.

Look into other types of loans

If a home equity loan is costing more than you’re prepared to spend, it might be worth considering a home equity line of credit (HELOC) or a personal loan, depending on how much you need to borrow and what you’re using the money for.

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