How Are Interest Rates for Home Equity Loans Calculated?

Interest rates on home equity loans will be lower than on unsecured loans because you are placing collateral. An unsecured loan, one that does not use collateral, poses a greater risk to the lender. A secured loan is safer, creating a lower interest rate. Other factors that will be considered include:

  • Credit score - Your credit score will have little effect on your loan limits. However, it will be a primary factor in determining your interest rates. If you want the lowest rates, ensure all of payments are current on any existing loans and revolving credit balances are low.

  • Other debts - Even if you have a good credit score, if you have a high portion of debt, your lender will consider you a higher risk borrower. To protect against this risk, the lender will assume a higher interest rate. Pay off any installment debts you can reasonably close prior to taking out a home equity loan.

  • Income - Your income will have more to do with your actual loan limit than with your interest rate, but it will still come into play. The higher your income, the more protection you can offer the lender. This is particularly true if you have been employed consistently for multiple years with an increasing salary rate.

 

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