Home Equity Loan Rates – What I Wish Someone Had Told Me
When my wife and I decided to renovate our kitchen (goodbye, 1990s oak cabinets), we started looking into home equity loans. And holy cow, I was not prepared for how confusing the rate situation would be.
Six months and one completed kitchen later, heres everything I learned about home equity loan rates. Hopefully it saves you some of the headaches I went through.
First Off – What Actually Affects Your Rate?
I naively assumed everyone got roughly the same rate. Nope. Your rate depends on a bunch of factors, and some of them you can actually control.
Your credit score matters. A lot. I have pretty good credit – around 780 – and I got a rate about 1.5% lower than what my brother got with his 680 score. Over a $50,000 loan, thats a difference of like $40 a month. Smallish difference in score, big difference in what you pay.
How much equity you have. This ones called the loan-to-value ratio, or LTV. Basically, what percentage of your homes value are you borrowing? If your house is worth $400,000 and you want to borrow $100,000, thats a 25% LTV (assuming you have no other mortgage… which you probably do). Lower LTV generally means better rates because theres less risk for the lender.
The loan term. Shorter loans usually have lower rates, but higher monthly payments. Longer loans are the opposite. We went with 10 years as a compromise.
Fixed vs Variable – My Somewhat Strong Opinion
Youll hear about both fixed and variable rate home equity loans. Heres my take: if youre doing a lump-sum home equity loan, you probably want fixed. Period.
With a fixed rate, your payment stays the same for the life of the loan. You can budget. You can plan. You know exactly what youre signing up for.
Variable rates start lower. Ill admit, theyre tempting. When we were shopping, the variable option was like 0.75% below the fixed rate. But heres the thing – rates were historically low at that point. They had nowhere to go but up. And guess what happened? They went up. A lot.
People I know who took variable rate home equity products back in 2021 are paying significantly more now than when they started. Some of them are paying more than they would have with the fixed rate I “overpaid” for at the time.
Is there ever a time for variable? Maybe if youre absolutely certain youll pay it off quickly. But for most people, Id say just lock in the fixed rate and sleep better at night.
Shopping Around Actually Works
I got quotes from five different lenders. FIVE. The lowest offer was 6.2%. The highest was 8.1%. Thats almost a 2% spread for the exact same borrower (me) on the exact same house.
Heres who I checked:
- My existing mortgage company
- My credit union
- Two online lenders
- A local bank
The credit union won. Which honestly surprised me – I expected the online lenders to be more competitive. Goes to show you cant assume.
Also, those rate comparison websites? Kind of useful as a starting point, but the real rates youll get often differ from whats advertised. Actually apply (or at least get a real quote) before making decisions.
Watch Out for Fees
This is where I almost got burned. One lender offered me a rate that was 0.3% lower than the credit union. Great, right? Then I read the fine print.
Origination fee: $500. Appraisal fee: $450. “Processing fee”: $350 (whatever that means). By the time you added it all up, the “cheaper” loan was actually more expensive over its lifetime.
Always look at the APR, not just the interest rate. The APR includes fees and gives you a more accurate picture of what youre actually paying.
Also – prepayment penalties. Some loans charge you if you pay them off early. We specifically chose one without this because we plan to throw extra money at it when we can.
How I Got a Better Rate
A few things that I think helped me get on the lower end:
I cleaned up my credit first. Paid down a credit card, disputed an error on my report, waited a few months. My score went up about 20 points. Worth the wait.
I didnt borrow as much as I could have. Yes, I qualified for more. But borrowing less meant a lower LTV and a better rate. Plus, you know, less debt.
I asked. Seriously. When one lender offered me a rate, I told them (truthfully) that I had a better offer elsewhere. They matched it. Not every lender will do this, but it never hurts to ask.
Timing Can Matter Too
Rates change based on what the Federal Reserve is doing. When they raise rates to fight inflation (like they did recently), borrowing costs go up across the board. When they cut rates, borrowing gets cheaper.
Im not saying you should try to time the market perfectly – thats basically impossible. But if you have flexibility on when you borrow, its worth paying attention to the general direction rates are heading.
The Risk Nobody Wants to Talk About
Heres the uncomfortable truth: a home equity loan uses your house as collateral. If you cant make the payments, you could lose your home. Thats not meant to scare you off – its just meant to make you think carefully about whether you actually need to borrow this money and whether you can actually afford the payments.
We ran the numbers multiple times before committing. What if one of us lost our job? What if rates go up (for variable loans)? What if the car dies and we have unexpected expenses?
We ended up borrowing less than we originally planned, specifically so wed have breathing room if something went wrong. The kitchen is slightly less fancy than we originally envisioned, but we can definitely make the payments. Good tradeoff, in my opinion.
Alternatives Worth Considering
Before you commit to a home equity loan, know your options:
- HELOC (Home Equity Line of Credit): This works more like a credit card – you can borrow as needed up to a limit. Rates are usually variable though, which, see my rant above.
- Cash-out refinance: Replace your entire mortgage with a new, larger one and pocket the difference. This can make sense if current rates are lower than your existing mortgage rate. (Theyre probably not right now, but things change.)
- Personal loan: No home required as collateral. Higher rates usually, but less risk to your house.
Was It Worth It?
For us? Yeah. The kitchen is done, its beautiful (if I do say so myself), and our payments are totally manageable. But I went in with my eyes open, shopped around, and didnt borrow more than we needed.
Do your homework. Compare rates. Read the fine print. Your future self will thank you.
