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Over the last several years, the unusual housing market landscape has resulted in a fair share of hurdles for potential homebuyers. Not only are today’s mortgage rates over twice as high as they were in 2020 and 2021, making it significantly more expensive to buy a home, but a lack of for-sale inventory continues to plague many markets nationwide.
Homeowners, on the other hand, have reaped the benefits of the recent housing market shifts — especially in terms of home equity. As home values climbed due to sustained demand from buyers, so did home equity levels. As a result, the average homeowner now has about $300,000 in home equity, about $200,000 of which can be tapped into for a wide range of purposes.
That can be beneficial in today’s high-rate environment, with personal loan rates averaging above 12% and credit card rates closing in on an average of 22%. Home equity loan rates, on the other hand, are averaging 8.6% right now, making them an affordable option compared to most other types of borrowing. But if you’re going to borrow against your home’s equity for home repairs, debt consolidation or another purpose, you should still try to secure the best possible rate.
Ready to get started? Find out what the top home equity loan rates are today.
4 ways to get the best home equity loan rate this August
If you want to obtain the most favorable home equity loan rate possible this August, these strategies could help:
Shop around (and negotiate)
While it can be exciting to get approved for a home equity loan, don’t settle for the first offer you receive. Different lenders may offer varying rates and terms, so be sure to obtain quotes from multiple sources, including local banks, credit unions, online lenders and mortgage brokers. Online loan marketplaces can simplify the process, as these platforms allow you to input your information once and receive offers from various lenders.
Remember, too, that some banks offer better rates to existing customers, especially those with multiple accounts or substantial deposits. So, it may benefit you to check if your current bank offers such discounts before exploring other options.
And, as you compare the offers, be sure to look at the interest rates and also the annual percentage rate (APR), which includes fees and gives a more accurate picture of the loan’s total cost. Don’t be afraid to negotiate, either. If you have a strong financial profile and have received better offers from other lenders, use this to your advantage, as some lenders may be willing to match or beat competitors’ offers.
Start comparing your top home equity loan offers online now.
Make sure your finances are in order
It can also help to make sure your finances are in order before applying. For example, your credit score plays a pivotal role in determining the interest rate you’ll be offered. Lenders view borrowers with higher credit scores as less risky, often rewarding them with lower interest rates. To improve your credit score:
- Pay down existing debts
- Make all payments on time
- Keep credit card balances low
- Avoid applying for new credit
- Check your credit report for errors and dispute any inaccuracies
Your debt-to-income (DTI) ratio is another crucial factor lenders consider. A lower DTI ratio indicates that you’re better positioned to handle additional debt. To improve your DTI:
- Pay off your existing debts
- Increase your income through side gigs or a better-paying job
- Avoid taking on new debts before applying for your loan
Consider points (and the alternatives)
Some lenders will allow you to pay for points upfront to lower your home equity loan interest rate. While this option is somewhat rare and requires you to come up with more money at closing, buying mortgage points on a home equity loan can result in significant savings over the life of the loan.
You may also want to consider a home equity loan with a shorter term if you can afford it. While longer loan terms may come with lower monthly payments, they also typically come with higher interest rates. But choosing a shorter loan term can often result in securing a lower rate. However, it’s important to ensure that you can manage the higher monthly payments that come with a shorter term.
It may also benefit you to consider the alternatives to a home equity loan. For example, a home equity line of credit (HELOC) might offer lower initial rates than a home equity loan — and it also offers more flexibility in terms of borrowing. However, HELOC rates are typically variable and may increase if the overall rate environment climbs.
Increase your home equity
The more equity you have in your home, the less risky you appear to lenders. This can result in better interest rates, so you may want to take steps to increase your home equity before borrowing. For example, you can make extra mortgage payments to more quickly pay down your home loan or make home improvements that add value to your home. Or, if you have some time before you need to borrow, it may benefit you to wait for your property value to appreciate naturally instead.
The bottom line
If your goal is to secure the best home equity loan rate this August, it may benefit you to improve your financial profile, shop around and be strategic in your approach. With these strategies, you’ll be better equipped to navigate the home equity loan market and secure a rate that aligns with your financial goals. Remember, though, that a home equity loan uses your home as collateral, so it’s crucial to borrow responsibly and ensure you can manage the payments comfortably — no matter what rate you ultimately secure on your loan.