Lowest Rates for Home Equity Loans – Complete Analysis
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What are the lowest rates for home equity loans? If you’re planning on utilising your home’s equity to access credit, there’s no doubt you want to save money in the process. You can pay less for a home equity loan by finding low rate equity loans and HELOCs, but you should also consider any accompanying fees involved.
Read on to learn about the lowest rates for home equity loans and other key considerations!
What is home equity?
Equity is calculated as the amount of debt owed on an asset subtracted from the asset’s current value. In the case of home equity then, it is the value of your home minus any remaining debt you have to pay to own the home outright. For many people, this will just be a single mortgage. The equity in your home can be calculated as a financial sum, but it is also expressed as a percentage.
Let’s take a look at an example…
If the current value of your home is £200,000 and the existing mortgage balance to be repaid is £100,000 then you have £100,000 equity – or 50% home equity. It’s crucial that an updated home value is used, rather than just the price you paid for the property. Valuations can change over time for many reasons, such as home improvements and gentrification.
Providing the home does not decrease in value, as you pay back your current mortgage through monthly payments, your amount of home equity will increase.
What is a home equity loan?
A home equity loan is a special type of loan that is secured against your home equity. You can access a lump sum loan amount based on the amount of home equity you have. You won’t be able to get a loan at the same value of the equity, but you could get as much as 85% of that figure as a loan.
For example, someone with £100,000 equity may be able to find home equity loans for up to £85,000.
However, you will not automatically be accepted for these loans just because you have equity. Your finances, income and credit score will all be assessed by the lender. If approved, you will pay it back through a monthly payment including capital and interest.
Most people use home equity loans to access lots of credit or take advantage of lower interest rates. They are generally used for home renovations, debt consolidation, buying new cars or even to buy more property.
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What is a home equity line of credit?
A home equity line of credit (HELOC) is very similar to home equity loans with some differences in the way the money is paid out and repaid. Instead of receiving the money as one payment, it is provided as a line of credit the homeowner can use over a draw period. Think of it a bit like the way someone would access money from a credit card (with an expiry date). During the draw period, only the interest is paid back, and after it, the capital and interest are repaid.
Another key difference between HELOCs and home equity loans is that the former has variable interest rates and the latter has a fixed interest rate.
The pros and cons of home equity loans and HELOCs
There are advantages of using a home equity loan or HELOC instead of a personal loan, but there are also some disadvantages. We illustrate the main ones here:
- The amount of credit you can get is based on a loan to value ratio of your home equity, usually up to 85% max. This means you can get up to 85% of your equity amount as a loan and a significant amount of credit for most people. Most personal loans only let you borrow around £25,000 max.
- Home equity lenders typically offer lower interest rates compared to unsecured loan lenders. With the equity in your home as collateral, they can afford to lend for less. However, this will be dependent on personal circumstances and your credit score.
- A fixed-rate of interest may be preferred
- These loans and home equity lines of credit are available from many banks, building societies and online loan lenders, giving you options.
- Even the best home equity loans still put your house at risk. You are at risk of losing your home if you do not pay in full over the whole repayment period.
- There may be additional fees to consider, such as an origination fee and closing costs. We discuss closing fees a little later in this guide.
What are the lowest home equity loan rates?
At the time of writing the lowest home equity loans and HELOCs have an interest rate of around 2%. With a home equity line of credit, the interest rate is variable and may dip below this figure in some circumstances for a period of time while you repay the loan.
What is the average rate for a home equity loan?
The average interest rate for home equity loans and HELOCs ranges between 2% and 10% at the time of publication and is subject to change. The best home equity loan rates will only be available to people with a good or excellent credit score who are not considered a lending risk by the individual lender.
Some unsecured loans and credit cards may have a comparable interest rate without asking you to use home equity as security in the credit agreement. However, these are only usually accessible to people with excellent personal finances and credit history. Other unsecured personal loans can offer interest rates above 40%.
And in either case, the amount of money you can borrow is usually dwarfed by the amount available through equity loans and HELOCs, subject to your home’s equity.
How to compare home equity loans
You can compare equity loans and HELOCs by searching for legitimate UK lenders online. Even when searching from the UK, you may come across lenders operating abroad, so make sure you’re looking at UK lenders only. Moreover, only consider lenders that are authorised and regulated by the Financial Conduct Authority.
It’s important to know that some UK banks stay away from home equity lending and your search may be more restricted than looking for other financial products, such as a mortgage or savings account. Because HELOCs have a variable rate that changes, these are difficult to compare independently, but you can compare home equity loans more easily.
First, are you eligible?
Before you dive into your research, you need to make sure you meet the eligibility criteria to get a HELOC or equity loan. You generally need to be at least 18 years old and plan to live in the UK for at least six months of the year.
The main eligibility criterion is that you have enough equity in your home to get one of these loans. You will need to have enough to satisfy the lender’s loan to value ratio and any minimum equity loan restrictions. For example, some lenders will require you to take out a minimum of £10,000, meaning you will need more than this amount of equity while still satisfying the LTV ratio.
Home equity loan calculators
When you do find a home equity loan advertised, the lender is likely to have included a home equity loan calculator within their web page. These calculators will first assess how much home equity you have (using the calculation we used at the start of this guide). This is to work out the maximum amount they are willing to lend by using a loan to value ratio.
Next, you will be able to add the details of the loan you wish to take out. For example, you will be able to input the amount of money you want to borrow based on the equity in your home and LTV ratio. And you can add how long you want to repay the money.
The calculator will then crunch the numbers and provide details on how much interest the average applicant would need to repay. These calculators are not always accurate because they do not account for personal circumstances
Getting professional help
It may be worthwhile asking for professional help, such as a financial advisor or mortgage lender. You may have to pay for these services but they could save you in the long run.
Can you negotiate home equity loan rates?
After applying for a home equity loan or HELOC, loan lenders will usually make you an offer which should be for the full loan amount. The offer may or may not be the interest terms you were expecting. It may be lower because the lenders found you had an excellent credit score, or it may be higher due to one of many reasons.
The lender will reject you if you did not meet their minimum credit score requirement or they believe any loan they offered would be unaffordable for you, as per responsible lending regulations.
If approved, it is up to you to accept or reject the loan terms and conditions, including the rate of interest offered. You will not be able to negotiate the interest. You may have expected a better rate, such as one advertised on the lender’s website. But it’s important to remember that these are representative rates of 51% of applicants only, meaning up to 49% of people are offered a different rate.
When you do receive an offer, don’t just focus on the rate of interest. You should pay attention to all the terms and conditions of the agreement and look out for closing costs!
What is a home equity loan closing cost?
The closing costs are a one-off fee or fees payable at the end of the loan repayment period. This is to settle the debt and have the lender complete all the required administration. These charges can be substantial and wipe off any savings you thought you were going to make by securing a low-interest rate.
This is why finding the lowest rates for home equity loans is not the only thing to keep in mind. You might be able to utilise the equity in your home for less by accepting a higher rate of interest with lower or no closing costs at all. Some lenders will not charge closing costs but factor them into your cost of borrowing.
How much is the closing cost on a home equity loan?
Equity loan and HELOC closing costs usually range between 2-5% of the total loan amount borrowed. Therefore, if you took out an equity loan or equity line of credit worth a total of £50,000 then you might be subject to an additional charge between £1,000 and £2,500.
With this in mind, you can see how these charges can wipe away any interest savings. The bigger your loan or lines of credit the greater these costs (if applicable!).
Alternative equity loan options
If you haven’t been able to secure an equity loan or HELOC with low rates, you may want to consider other credit options, such as:
- A second mortgage or remortgaging to release equity – cash-out refinance and mortgage rates can differ from HELOC and equity loan repayment terms
- Unsecured loans and credit cards – ideal if you don’t need significant credit
- Lifetime mortgages – suitable for seniors needing equity
Free home equity loan support!
This is just the tip of the iceberg when it comes to the free home equity loan information MoneyNerd has whipped up. Our team has just published an array of new articles and guides all about these types of loans, HELOCs and what to think about before utilising the equity in your home.
Head back to our blog for more – and use a money advice service for tailored financial support!