A home equity loan allows a homeowner to use the equity they have built up over several years living in their home as collateral for a second mortgage. Homeowners can essentially inject liquidity into their asset holdings, freeing up cash for investments or to cover expenses. This can be a great way for homeowners to cover unexpected costs such as medical bills, or help put their children through college. Many people are unsure how to find the best fixed home equity loan rate. Here are three hints to help you find the best rate to suit your long-term financial plans.
Loan rates are determined by many factors
The rate equity loan rate that your mortgage broker will quote you is based on a number of different factors. Banks and lenders use a variety of methods to calculate their own interest rates, understanding their processes allow you to better negotiate your loan terms to get the best deal for you. Typically, the lender will begin with the prime rate of interest set by the Federal Reserve. This prime rate is the benchmark, or the rate that the bank would charge to customers with perfect credit. The bank will then consider their own risk in lending, given the current economic climate and make adjustments to protect their bottom line.
Finally, the bank will take a look at your credit profile to see how great a risk you will pose as a loan borrower. Depending on your current ratio of assets and liabilities, your history of making payments on time, and your credit score, the bank will then determine the risk that your loan would impose on them, and offer you the effective interest rate that will be signed into contract. Luckily, you can choose different loan options and terms to negotiate a lower rate to some degree.
Fixed vs. Variable Rate Interest Loans
Fixed rate mortgages are fairly simple. The effective rate of interest listed on the loan contract is the rate you pay for the duration of the loan. It never changes, unless you take on another mortgage. A variable rate, on the other hand, fluctuates with the market, and allows the banks to stay profitable in bad times by raising your interest rate. Usually and adjustable rate mortgage or ARM has a cheaper interest rate than its fixed counterpart.
Furthermore, an ARM can modified to limit the amount it can be adjusted in a given time period, or even grant you the ability to convert it to a fixed rate after a few years, to help you mitigate the risks of a volatile economy. In general, all ARMs adjust in an upward trend over time, whereas a fixed rate mortgage holds far less risk. If you plan to have more money in the future, you can often take advantage of an ARM to pay a lower rate in the first few years of the loan.
Get Multiple Quotes
Finally, you can often get lower rates and better terms simply by shopping around. If you are comfortable doing so, you can often find, apply for, and receive your equity loan entirely online. Online lenders have lower overhead costs than traditional banks, so they can usually offer better terms and lower rates. Get several quotes from both online and traditional lenders. If you are not confident navigating loan terms and rates, you might consider speaking with a mortgage broker who can educate you and shop from many different lenders to find the best rates and terms to meet your needs.