Current home equity loan rates
Most home equity loan rates are indexed to a base rate called the prime rate, which is tied to the federal funds rate set by the Federal Reserve. The prime rate represents one of the lowest rates that lenders will offer to their most attractive borrowers.
When the Fed votes to raise the federal funds rate, you can expect that the prime rate will go up as well, and home equity loan rates will follow. When the Fed votes to lower the federal funds rate, borrowers who are shopping for a home equity loan can expect that rates will soon drop. The last Federal Reserve meeting ended on January 31, 2024, where central bankers voted to leave rates unchanged. The next meeting is March 19-20, 2024.
Current prime rate | Prime rate last month | Prime rate in the past year — low | Prime rate in the past year — high |
|---|---|---|---|
8.50%. | 8.50%. | 7.75%. | 8.50%. |
Lenders will calculate a rate offer based on the current prime rate, along with factors such as your credit score, debts, and income, as well as how much you’re trying to borrow.
Unlike HELOCs, home equity loans have a fixed rate. If rates come down after you close on your loan, the only way to change your rate is to refinance.
How to get a good home equity loan rate
Your credit score is a major factor influencing your mortgage interest rate. While the minimum credit score accepted by many lenders is 620, You're more likely to be approved for a home equity loan with a credit score of 700 or higher. The lowest rates tend to go to borrowers with credit scores in the mid-700s or higher.
Lenders also consider your debt-to-income ratio — the percentage of your monthly gross income that goes towards paying debts — when determining your rate offer. Typically, lenders like to see a DTI of 43% or less.
Some lenders will offer a discount on a home equity loan's interest rate if you have another account with the bank.
» MORE: Requirements for a home equity loan
How to choose a home equity loan lender
You’ll want to shop around multiple home equity loan lenders to find the best offer. In addition to looking for the lowest rate, some other factors you may consider include:
Borrowing limits. Some lenders have minimum or maximum borrowing limits, so you’ll want to narrow your search to lenders that will allow you to borrow what you need, and no more.
Terms. Review the term options offered by your potential lenders and consider what works best for you. Shorter terms, for instance, will require higher monthly payments, but will result in less interest paid overall. Longer terms will accrue more interest, but will have smaller monthly minimum payments.
Fees. You’ll want to compare any lender fees, which can potentially offset lower rate offers.
Qualification requirements. Some lenders will post their loan requirements, such as their minimum accepted credit score and the amount of existing debt a borrower can have. The stronger your application is relative to these requirements, the lower the rate you’re likely to be offered.
» MORE: Our picks for best home equity loan lenders
How to calculate your home equity loan payments
In addition to your interest rate and the amount that you borrow, the terms of your loan term will affect your payments. For example, a borrower with a 15-year loan will have higher monthly payments than if they had gotten a 30-year loan, though they will pay less overall because they’re making fewer payments.
How to apply for a home equity loan
Before you apply for a home equity loan, you’re going to need to gather documentation such as:
Current and previous addresses.
Current and previous employer information.
Your social security number.
A government-issued ID.
Your most recent pay stubs and two years of W2s or tax returns.
It’s best to apply with multiple lenders, so that you can compare rate offers. NerdWallet’s roundup of the top home equity loan lenders can help you narrow your selection.
» MORE: How to get a home equity loan that’s best for you
Best reasons to get a home equity loan
The money you receive from tapping your equity is yours to use as you see fit. However, since the loan is secured by your home and you risk losing it if you cannot pay, it’s wise to prioritize expenses that will add to the value of the home and help further grow your equity. Many borrowers use their home equity loan to execute a renovation project, or to repair some part of the home.
When you use a home equity loan to buy, build or substantially improve a home, the interest may also be tax-deductible. This is a unique benefit of home equity loans and HELOCs; if you were to finance the same project with, say, a home improvement loan, it’s unlikely that you would be eligible for a tax deduction.
Alternatives to home equity loans
There are other ways to access equity without selling your home.
A home equity line of credit, or HELOC, is a variable-rate credit line, similar to a credit card. You may borrow against your equity, up to a limit. When you repay all or some of it, you may borrow again, up to the credit limit. You pay interest only on the amount you borrow.
Usually, the initial interest rates on HELOCs are lower than for home equity loans. But HELOCs often have variable rates, which may rise or fall periodically, while home equity loans have fixed rates. If you want to take advantage of the flexibility of a HELOC but prefer the predictable payments of a home equity loan, you could consider going with a lender that offers a fixed-rate HELOC.
A cash-out refinance replaces your current home loan with a new mortgage for more than you owe, and you take the difference in cash. See the pros and cons of a home equity loan versus a cash-out refinance.
Personal loans typically have higher rates than home equity loans, because they aren’t backed by an asset. They’re also less risky, since home equity loans carry the danger of losing your home to foreclosure if you can’t make required payments. See the pros and cons of a home equity loan versus a personal loan.
» MORE: Getting a HELOC vs a home equity loan
