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June 2, 2022, 1:17 p.m. EDT

One surprising thing people think is a dealbreaker to getting a home equity loan or HELOC — but often isn’t

By Anna-Louise Jackson

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It’s a good time to be a homeowner looking for a loan. Thanks to surging home prices across the country in the past two years, homeowners have record levels of equity in their residences that they can tap into with either a home equity loan or a home equity line of credit (HELOC). And as homeowners watched interest interest rates rise earlier this year, some are now looking to take advantage of today’s rates in case they creep higher ( see the lowest home equity rates you might qualify for here ). But HELOCs or home equity loans aren’t right for everyone — and you’ll want to make sure you get the most competitive rate you can if you decide to take one out.

The first thing to know is that the rates you see advertised could vary from what you’re actually offered by a lender, notes Greg McBride, a chief financial analyst and senior vice president at Bankrate.com. “Just like with getting approved for a mortgage, those people with good credit and a healthy equity cushion are poised to get the best rates.”

After deciding whether a HELOC or a home equity loan is a better fit — the differences boil down to why you need the money and how much you need to borrow — it’s time to shop around for the best rate. Here’s what you should know.

See the lowest home equity rates you might qualify for here .

Your personal financial situation matters

Before you start calling lenders or researching rates online, it’s important to set some expectations. “The amount of equity you have is not the amount you can borrow against,” McBride says, adding that lenders typically want homeowners to retain a 20% equity stake in their homes. “Having $100,000 in home equity doesn’t mean you can borrow $100,000.”

With either a HELOC or a home equity loan, lenders also consider your overall financial situation. Worried about your credit score? It’s often not a deal-breaker, McBride notes. “Weak credit can be compensated for by having a significant stake of equity,” he says. “Ideally, to get the best terms, you’ll have a combination of good credit and sufficient equity.”

To get the best rate on a HELOC, Bankrate advises that borrowers need a high credit score (670 and up), a low debt-to-income ratio (43% or less) and a loan-to-value ratio of 85% or less. By comparison, the best rates for home equity loans will go to those borrowers with a comparable debt-to-income ratios and credit scores, along with at least 15% to 20% equity in their homes. 

Call several lenders and shop online

You may want to start by calling banks you already have existing relationships with, including your mortgage provider, and local banks. It can help to have a baseline for comparison first, and the average rate for equity loans is 5.96% currently vs. 4.27% for HELOCs, according to data collected by Bankrate. ( See the lowest home equity rates you might qualify for here .)

Because the amount of money at stake is far less than for a mortgage, a lender you find online may not be so interested in extending this credit, says David Schneider, a certified financial planner with Schneider Wealth Strategies. “Generally, I advise people to go to their local banks because they will be interested in those loans.” Local banks will also have more knowledge about your local housing market and dynamics in the job market in your area, and may be more comfortable lending to consumers who don’t fit the credit score or equity requirements that bigger banks want, McBride says.

That said, you could find the best rates online or by calling several banks and credit unions, McBride adds. “That’s why you’ve got to shop around.”

HELOCs are the “dominant” home equity product — borrowers prefer them to home equity loans and lenders are more likely to offer these lines of credit, McBride says. If you opt for a HELOC, then it’s important to be mindful of the interest rate dynamics associated with these lines of credit.

Specifically, some lenders offer a promotional (or teaser) rate that may be valid for the first six months before the interest rate jumps higher. This type of structure could be helpful if you’re paying off debt, McBride notes. “That low rate can be great, but you just want to go into that with both eyes open.”

Borrowers may be surprised by just how much rates go up after the promotional period ends, notes Schneider.  While lenders are required to disclose this information, look for lenders that provide terms in a straightforward way, McBride says. “It’s really important to comparison shop.”

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