steps on getting the best rate
Getting best rate and terms involves having good credit, better than average debt ratios and LTV values that are high. But it is also helpful to understand how rates work to better understand how to negotiate your best rate position.
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understanding lending rates
Negotiating Steps for Best Rate
published interest rates can vary from the actual rate that has been quoted due to factors that consider your credit rating, income ratios, type mortgage loan, mortgage qualifications and location. To get the best rate, you must negotiate your rate down using the following steps:
First step, check your credit rating:
The higher your credit score (FICO 720 and up), the stronger your position to negotiate best rate.
If your credit rating is below FICO 700, you might consider steps to strengthen your credit score:
see checking your credit report
Analyze your debt ratios:
Again, if your debt ratio is within lending parameters (36% or less), you are in a strong position to negotiate rate and terms.
You might consider paying off your debts, closing credit card and retail charge accounts that are not in use prior to submitting your application.
click here to calculate ratios
Understand what type home equity:
Knowledge is power. Know what type of home equity product you need: fixed rate loan or open equity line credit.
start with this page if you haven't done so already it will illustrate your home equity need and what product type may be best for your financing needs.
Submit your application:
Allow our network of financial advisors from your area compete for your business - get up to 4 lender quotes
search your home equity among multiple lenders for best option - see list request a rate quote and terms from up to four lenders or dial toll-free: 1-877-777-1370
Collect and analyze lending offers:
use this loan comparison worksheet (FREE download) to compare rates and terms among the lenders that have reviewed your application
loan comparison worksheet (pdf)
compare these lender rates and terms with other published rates and with lenders in your local market
you are now in the position to negotiate with your lender of choice to match or beat any rate that you feel you deserve
Notify the lender that you have shopped programs and if they want your business, they must meet other competitive offer.
Please note: rate information supplied by external links do not reflect your actual rate. Your actual rate is a reflection of your credit score, loan amount, LTV position, and competing factors as you negotiate best rates and terms among lenders.
Note that home equity rates can change daily. Rates will also differ by region and locality.
We do not list rates on this site since we are not a lender and cannot determine rate based on the factors above. Rather we list references to rate information where you can view sample rates from various regions and lenders.
understanding lending rates
How Lenders Determine Rates
LTV stands for: Loan-to-Value
Banks and other lenders will extend you credit based upon a percentage of the estimated market value of your home.
That percentage of market value minus the amount you owe on your first mortgage (plus any 2nd or 3rd mortgages that you may have) becomes the maximum amount of credit that lenders will give you.
Let's say that your home has an estimated market value of $250,000. The amount that you still owe on your first mortgage and any other liens is $150,000. The maximum amount you can borrow is calculated as follows:
Estimated Market Value: $250,000 $250,000 Percentage LTV: 70% 80% Percentage of Market Value: $175,000 $200,000 Less Mortgage Debt: $150,000 $150,000 Equals Total Equity: $50,000 $50,000
Estimated Market Value: $250,000 $250,000 Percentage LTV: 90% 100% Percentage of Market Value: $225,000 $250,000 Less Mortgage Debt: $150,000 $150,000 Equals Total Equity: $75,000 $100,000
Banks and other lenders generally charge higher interest rates for higher percentages of LTV. Most market quoted rates of PRIME + 0% are for LTV percentages of 80% or lower.
To get the best rate, keep your loan request at 80%LTV or lower.
Calculate your own LTV borrowing amount
The Amount You Intend to Borrow
Many lenders use "Tiered Pricing" for their home equity lines and loans. This means they will offer different rates at different levels of borrowing. The more you borrow, the lower the rate.
The terms often used when quoting rates are points and basis points. A "point" equals 1%. Basis points equals 1/100 of 1%.
For example, if you hear something like:
"... if you borrow 80% of your total approved balance, we will reduce your rate by 25 basis points".
25 basis points equals one-quarter of a point (25/100). They will reduce your rate by one-quarter of a point if you borrow 80% or more of your approved balance.
If you intend to borrow a large percentage of your approved amount, negotiate with your lenders for a reduction in your overall rate.
Your Credit History Report
Lending institutions review the following information from your credit history report to determine your creditworthiness:
- your current outstanding debt
- places and the number of times you have applied for credit
- the kind of credit you have taken out in the past
- late payments
- over extension of your credit lines
The report lists any payment delinquencies that you may have had over the past three years. You need a credit history of at least one year to ensure a good credit report. The report can be a factor in a lending institution's decision to approve or decline your home equity application.
A credit score determines the rate the lender may charge you. The higher your credit score, the lower your home equity rate.
You should review your credit report for any errors before applying for loan. Link to our credit site www.SayEducate.com for credit management guides:
everything about credit management
Your Local Market
Rates can vary by region, due to competition and money supply/demand.
- If lending institutions in one region find a very competitive market for home equity products, they may offer lower rates than published national rates.
- Likewise, if lenders in certain markets have a tight supply of money, their rates may be higher than published rates.
Most lenders charge the same rate across all their channels. Rates posted on a bank's web site is generally the rate you will find if you walk into a branch or telephone a call center, but not always.
- Lenders will negotiate rates if you meet their criteria for borrowing.
- They know that consumers have access to rate information from lending institutions from across the country.
- So be prepared to shop and negotiate your rate down.
Other Rate-Determining Factors
Other rate-determining factors are market conditions and competition. If lenders need to build their portfolio of loans, or if they need to move into a new market, they may offer really attractive rates to build their loan portfolio.
Many lenders offer "teaser or introductory rates". These are lower-than normal rates for a period of time to "entice" consumers to close their loan application with them. But after a certain length of time, usually from 6-12 months, the "introductory rate" reverses back to the normal rate.
understanding lending rates
Understanding Equity Line Rates
Most lenders use the PRIME RATE as a index when calculating home equity line of credit rates.
They will then add a margin to the index to come up with the rate that they will charge for your home equity product.
PRIME + 0.00%
This quoted rate means that the lender will charge you the index (PRIME RATE) plus a margin of 0.00%.
Your interest rate will then be: The PRIME RATE
If you see this rate quote:
PRIME + 1.5%
The lender will charge you the index (PRIME RATE) plus a margin of 1.50%.
Your interest rate will then be: PRIME RATE + 1.50%
If you see the rate quote:
PRIME - 0.5%
The lender will charge you the index (PRIME RATE) minus a margin of 0.50%.
Your interest rate will then be: PRIME RATE - 0.50%
Since rates for home equity lines fluctuate meaning that whenever the PRIME RATE increases or decreases your interest rate will likewise go up or down along with the PRIME RATE.
- For example, if the PRIME RATE increases one-quarter point, each of the interest rates quoted above will increase by exactly one-quarter point.
- Likewise, if the PRIME RATE decreases by one-quarter point, your new interest rate will decrease by the same amount.
Rates can vary by institution. Some lenders charge a low rate but may impose annual fees and other usage fees. It is important that you "read the fine print" before selecting a home equity product based on rate only.
Some lender charge tiered rates, which means the more you borrow that lower your rate.
If you come across lenders who use a different index other than PRIME RATE, request to see a historical trend of their rate increases and decreases. Compare this to the historical trends of the PRIME RATE.
understanding lending rates
Understanding Equity Loan "Fixed" Rates
Banks use several factors to calculate the fixed rate on home equity loans. Two key factors include:
- the lender's cost of funds
- the lender's cost of capital
Allow us to use this simple illustration
Banks collect and manage money deposits like checking and savings.
There is a cost associated with collecting and safeguarding deposits, which include the interest rate consumers collect on their accounts, interest rates from the fed and other banks for borrowed reserves, safekeeping, and other insurance and maintenance fees.
Banks don't let these deposits sit idle
They take these deposits and lend it out in loans and other advances.
When banks turn that money into loans, there is a "cost of funds" associated with the use of that money.
Banks are in the business of making money
So they will take the "cost of funds" and other related maintenance and servicing expenses and add a margin as profit.
This adds up to the interest rates they are charging for fixed-rate home equity loans.
Of course, there are more sophisticated models that go into the loan rate that include the "cost of capital". But that is beyond this scope.
Just note that when the "cost of funds" go down, lenders pass on the decrease in lower home equity loan rates.
- Likewise, when the "cost of funds" increase, you will find an increase in home equity loan rates.
- Home equity loans are generally FIXED rates, meaning the rate and payment will remain the same during of the life the loan.
- Fixed rates for home equity loans can vary by your LTV position, the amount you borrow, and your credit history rating.
- If you are strong in each of these areas, you can expect an attractive FIXED rate offer from a lender competing for your business.
The home equity rate ranges displayed are blended rate ranges sampled from lending institutions. The rate ranges are for illustrative purposes only and may not be the actual rate quoted.
You may find home equity rates that may be lower than the rate blends above. Many of these rates are introductory rates that revert up after a period of time. Read the find print before deciding on a particular listed rate.
Note that interest rates do vary among institutions and are subject to change due to your LTV position, credit quality, amount being borrowed, and local region. The rates quoted by lenders are usually available at 80% to applicants with high credit scores and debt positions.
Note that the FIXED home equity rate range is not tied to the PRIME Rate. We only use the PRIME Rate as a benchmark to estimate what the range of fixed rates may be for home equity loans.
Please use these rate ranges as an example of what interest rates you may expect. Rates can change daily. The rate quoted may be lower or higher than the range shown. Be prepared to negotiate your rate.
LetsRenovate.com is not a lender. Therefore, we cannot quote rates or guarantee best terms. We refer applicants interested in getting a lending quote to Secure Rights, a licensed mortgage broker representing multiple home equity lenders.