How Your Home Equity Interest Rate Is Calculated

Your home equity interest rate is calculated based on your general creditworthiness. This is a difficult measure to make, but the lender will look at given factors in order to determine how likely you will be to make payments on time and pay off the loan on schedule. Your credit report will provide the majority of this information, and your application will supplement the report.

Past Debt Management

The way you have managed your debt in the past is measured by your credit score and shown on your credit report. If you are applying for a revolving home equity line of credit, your performance on previous revolving lines will be measured heavily. The most common type of revolving credit is credit card debt. If you are opting for an installment home equity loan, the lender will be particularly concerned with your previous installment debt. Your mortgage will be the number one loan considered in this case, but car loans and student loans will also be important. Missed payments will raise the interest rate on your loan.

Likeliness to Keep Contract

Home equity loans are often subject to refinancing, modification and prepayment. Lenders do not like when these things occur because they change the total profit the lender initially anticipated on the loan. As a result, home equity lenders will be very wary of lending to individuals who have modified debts in the past. When you modify a loan, the lender shows the behavior on your credit score. This is especially the case if you paid off an existing loan with a third party refinancing loan. Expect higher rates if you have engaged in this type of loan assistance in the past. Loan consolidation can raise red flags for home equity lenders that will drive up interest rates.

Total Existing Debt

Lenders like to see you have a low amount of debt to your name. They also like to see you have high limits of possible credit in some areas. Having too much available credit, however, can be a red flag as well. If you have 4 or 5 credit cards each with $10,000 limits, you could go into $40,000 of debt tomorrow. Home equity lenders would see this as a risk of default. Instead, they like to see your debt is manageable month-to-month based on your income. Having too much debt or too much credit will lead to higher interest rates on the loan.

Stability of Income

Lenders prefer to lend to individuals with stable employment for at least two years. You can prove stability of employment by submitting tax schedules. Where possible, lenders prefer working with people who have been with the same company and received several small raises. Self-employed persons or business owners are considered high risk borrowers. As such, they will see higher interest rates on their loans. Ultimately, interest rates are a way for lenders to make back he sum loaned quicker. That way, if the borrower defaults, the lender will lose less on the loan opportunity. All of the above factors measure your risk to the lender.

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