Also called a second mortgage, home equity loans allow you to borrow money based on how much of your home’s value you own at the moment of borrowing, i.e., equity. Lenders calculate your stake in a home by subtracting the mortgage owed from its value.
They offer loans up to 80%-90% of the home’s value depending on various factors, including the ability to pay, credit score, and debt-to-income ratio. This piece is an insight into home equity loans’ advantages and tips on getting the best home equity loan rate.
How Home Equity Loans Work
Home equity loans enhance access to credit, come with low-interest rates, and the repayment is fixed throughout the service period. They’re helpful when you need financing for activities such as home improvement and expansion or starting a business. You can also take a home equity loan from Achieve loans to consolidate your debts and avoid high-interest rates and the hassle of dealing with different lenders.
Interest rates remain the same from the first to the last payment. However, the percentage of interest varies by lender, and it’s influenced by factors such as existing mortgage balance, the value of the home, income and credit history, payment schedules, and the loan amount.
Here are some tips for getting the best rates when seeking a home equity loan.
Lower Your Loan-to-Value Ratio
A loan-to-value ratio(LTV) is calculated by dividing your mortgage balance and the home’s appraisal value. It compares the amount of the home equity loan you’re seeking to the actual value of a home and significantly impacts the interest rates a lender charges. A lower LTV ratio will attract favorable rates than a higher one because it shows you have more equity in your home and hence less risk on the lender. One of the best ways to reduce your LTV ratio is by paying off as much loan as fast as possible, i.e., saving up a larger deposit. Another option can be increasing the value of your property by making improvements.
Improve Your Credit Score
Most financial institutions offer home equity loans even to homeowners with poor credit scores because they know they can count on the home’s value if you default. However, you may have to pay high-interest rates to compensate for any additional risks, e.g., a situation where multiple creditors seek to recover defaulted debts from the home’s value. On the other hand, you can attract low-interest rates with a good credit score since it convinces the lender there are low-risk levels. Before going for a home equity loan, improving your credit score is advisable. Several ways to achieve that include paying bills on time, avoiding maxing out or opening new credit cards, and avoiding losing credit cards after paying them off to increase your credit utilization ratio.
Get A Co-Signer
A cosigner agrees to take on the financial responsibility of the home equity loan in case the primary borrower defaults. The cosigner signs a binding contract that allows the lender to come after them if you fail to pay the loan. Getting a cosigner is a good option when you want the best rates with a poor credit score. They help reduce risk on the lender’s side by offering an alternative method to recover the loans from persons with poor credit scores, hence, lower interest rates. In most instances, relatives are considered eligible co-signers, i.e., parents or siblings.
Are you looking for a loan to sort out your financial needs? Consult Achieve for guidance and the best home equity loan rates. We are a digital personal finance company that empowers people to create a better financial path through favorable personal and home equity loans.