Disclaimer: The prime rate directly influences the rates on HELOCs and home equity loans.
Key Points
• Bay Area home equity loan rates are influenced by the prime rate and by the borrower’s financial profile, among other factors.
• Home equity loans usually require you to pay closing costs, which typically range between 2% and 5% of your loan amount.
• Fixed interest rates provide stability, while adjustable rates may offer lower initial payments.
• Home equity lines of credit (HELOCs) and cash-out refinances are alternatives to home equity loans that also let you tap home equity.
• Online tools and calculators can help you quickly and easily estimate loan payments and total interest.
Home equity loans can be a powerful financial tool for homeowners seeking to leverage the equity in their homes. And to get the most out of these loans, it’s key to get a good rate.
This comprehensive guide will investigate the ins and outs of home equity loan rates, shedding light on how they’re influenced by broader economic factors and the borrower’s financial profile. We’ll also explore the distinctions among different types of home equity loans, including home equity lines of credit (HELOCs) and cash-out refinances, and provide you with tips on using financial tools and calculators to estimate your monthly payments for different loans. And we’ll discuss how to secure the most favorable rates, as well as the potential risks and rewards involved.
Whether you’re contemplating a home improvement project, debt consolidation, or financing a major purchase, this guide can help you navigate through the intricacies of home equity loans, empowering you to make the best financial decision for you.
What is a home equity loan? A home equity loan allows you to tap your home’s equity to borrow a cash sum, which you usually repay in fixed monthly installments over a term of five to 30 years. The loan is secured by your home, which can mean lower interest rates than you’d probably get with an unsecured personal loan.
Typically, lenders want you to have a minimum of 20% equity in your home to qualify for a home equity loan. You can still be paying off your mortgage, but the amount you owe should not be more than the house is worth. If you’ve been paying your mortgage regularly and you’re wondering how to get equity out of your home, a home equity loan might be a great option
Bay Area home equity loan rates are determined by a variety of factors, including the current economic environment and your own financial picture.
The Federal Reserve’s policy on interest rates has a major impact on the lending market. Lenders base their rates on the prime rate, which is influenced by the Fed’s decisions. When the prime rate rises, you’re likely to see home loan interest rates go up as well.
Your credit score and debt-to-income (DTI) ratio also play a role in determining your interest rate. Typically, the higher your credit score and the lower your DTI ratio, the lower your interest rate will be. Your loan’s amount and repayment term can also influence the interest rates you’ll be offered. Larger loans and longer terms often result in higher rates since they can pose more risk to the lender.
The interest rate you get on your home equity loan has a major effect on how affordable the loan will be over the long term. Even an apparently inconsequential difference in interest rates can mean a significant savings or added cost.
Let’s take an example: Consider a $100,000 home equity loan with a 15-year repayment term. With a 8.50% interest rate, your monthly payment would be $986 and your total interest over the life of the loan would total $77,253.
But if your interest rate is one percentage point higher, at 9.50%, your monthly payment would rise to $1,044, and the total interest you’d pay would jump to $87,960. That’s just one percentage point creating a difference of more than $10,700 in interest over the loan’s life – which underscores the importance of hunting down the best home equity loan rates.
The chart below shows how changes in your loan amount, interest rate, and term interact to result in different monthly payments.
| Loan Amount | Loan Term | Interest Rate | Monthly Payment |
|---|---|---|---|
| $100,000 | 20 years | 8.00% | $836 |
| 7.00% | $775 | ||
| 10 years | 8.00% | $1,213 | |
| 7.00% | $1,161 | ||
| $50,000 | 20 years | 8.00% | $418 |
| 7.00% | $388 | ||
| 10 years | 8.00% | $607 | |
| 7.00% | $581 | ||
| $25,000 | 20 years | 8.00% | $209 |
| 7.00% | $194 | ||
| 10 years | 8.00% | $303 | |
| 7.00% | $290 |
Home equity loans often come with fixed rates, but occasionally a lender may offer adjustable rates, so it’s helpful to consider which makes more sense for you. Fixed rates never change, which means your payments will stay the same every month for the life of the loan. This can be a great choice if you like predictability, which can definitely help with budgeting and planning.
Then there are adjustable rates, which more typically come with other kinds of loans, including HELOCs. Adjustable rates start out with a lower rate for a defined period and then adjust with the market. Since they tend to start out a bit lower than fixed rates, they can be more budget-friendly at the outset. Just remember, since the rates do adjust, they may lead to higher payments down the road.
Predicting interest rate movements is like trying to forecast the weather — there are many variables at play. Just look at the prime rate’s history to see how much it can fluctuate. In 2020, it was just 3.25%, but by 2023, it had soared to 8.50%.
| Date | Prime Rate |
|---|---|
| 9/19/2024 | 8.00% |
| 7/27/2023 | 8.50% |
| 5/4/2023 | 8.25% |
| 3/23/2023 | 8.00% |
| 2/2/2023 | 7.75% |
| 12/15/2022 | 7.50% |
| 11/3/2022 | 7.00% |
| 9/22/2022 | 6.25% |
| 7/28/2022 | 5.50% |
| 6/16/2022 | 4.75% |
| 5/5/2022 | 4.00% |
| 3/17/2022 | 3.50% |
| 3/16/2020 | 3.25% |
| 3/4/2020 | 4.25% |
| 10/31/2019 | 4.75% |
| 9/19/2019 | 5.00% |
| 8/1/2019 | 5.25% |
| 12/20/2018 | 5.50% |
| 9/27/2018 | 5.25% |
As you search for a home equity loan, the key is to stay in the know about economic trends and, as much as you can, time your application to coincide with favorable conditions.
To snag the most competitive home equity loan rates, you’ll want to put your best financial foot forward. Even if you haven’t decided yet on a HELOC vsa home equity loan or even a cash-out refinance, the strategies below can help you prepare to secure the most favorable interest rates and loan terms.
Here’s the deal: To be eligible for a home equity loan, you need to have at least 20% equity in your home. Calculating your equity is easy: Simply subtract your current mortgage balance from your home’s market value. For instance, if your mortgage balance is $750,000 and your house is valued at $1,000,000, your equity would be $250,000.
Typically, lenders will loan you up to 85% of your available equity, meaning that in this example, you could potentially borrow as much as $212,500. A home equity loan calculator can help you figure out how large a loan you may be able to access. Making mortgage payments promptly and investing in home improvements are smart ways to build equity.
In general, lenders require a credit score of at least 680 for homeowners seeking home equity loans, with many asking for 700 or more. A strong credit score is an indication of financial responsibility, which is why it can lead lenders to offer more favorable home equity loan rates.
To maintain a robust credit score, or build one, be sure to pay your bills on time, keep your credit card balances low, and avoid new debt. Regularly checking your credit report for errors and disputing any that you find can also be beneficial. By maintaining a high credit score, you’re increasing your chances of securing a lower interest rate.
The debt-to-income (DTI) ratio is a crucial factor in qualifying for a home equity loan and scoring a favorable rate. Most lenders look for a DTI ratio under 50%, with an ideal target of 36% or lower.
This ratio compares monthly debt commitments, including the prospective home equity loan payments, to your monthly income. Having a low DTI ratio signals to lenders that you’re financially equipped to handle additional debt, which can increase your chances of approval and of snagging a competitive interest rate.
Property insurance is a must-have for home equity loans, especially in regions prone to natural disasters, like earthquakes or wildfires. It’s a safety net for both you and your lender in the event of property damage.
Without property insurance, you’d probably find it challenging to get the loan approved or to secure favorable rates. Make sure your insurance policy aligns with your lender’s needs and provides comprehensive coverage for your home. It may be helpful to consult with an insurance agent.
Online tools and calculators can help you in your search for the best loan for you in a variety of ways. You can use them to estimate monthly payments and total interest for different loan options, making it easier to understand the impact of different home equity loan rates. Simply by inputting a few facts like your home’s value, your outstanding mortgage balance, and other financial details, you can quickly and easily get a clearer picture of what you can afford and make an informed decision.
Enter a few details about your home loan and we’ll provide you your maximum home equity loan amount.
Punch in your HELOC amount and we’ll estimate your monthly payment amount for your HELOC.
Use SoFI’s HELOC interest calculator to estimate how much monthly interest you’ll pay .
Using the free calculators is for informational purposes only, does not constitute an offer to receive a loan, and will not solicit a loan offer. Any payments shown depend on the accuracy of the information provided.
When it comes to closing costs for home equity loans, you can expect to pay between 2% and 5% of the loan amount. Below are some typical costs.
| Service | Typical Fees |
|---|---|
| Appraisal | $300-$500 |
| Credit report | $30-$50 or more |
| Document prep | $100-$500 (may also be billed on an hourly basis if an attorney is involved or be built into the loan origination fee) |
| Loan origination | 0.5%-1.0% of the loan amount |
| Notary | $20-$100 |
| Title insurance | 0.5%-1.0% of the loan amount |
| Title search | $75-$250 or more |
Some lenders offer no-closing-cost loans, but these often have higher rates. Compare lenders’ fees to find the best deal.
Here’s a potential bonus: The interest on your home equity loan might be tax-deductible if you use the loan to improve your home. For single filers, interest is deductible on the first $375,000 of loan debt. Spouses filing together can deduct the interest on up to $750,000 of debt. But bear in mind that you will have to itemize if you want to claim this deduction. It’s a good idea to check with a qualified tax advisor to get the latest information and advice.
While home equity loans are a popular choice, there are other options to explore if you’re interested in figuring out how to get equity out of your home. A home equity line of credit (HELOC) and a cash-out refinance are two such alternatives.
With a HELOC, you get a revolving line of credit with variable interest rates, while a cash-out refinance is a kind of mortgage refinance that replaces your existing mortgage with a new one for a larger amount than you owe, giving you the difference in a lump sum.
What is a home equity line of credit? It’s like a credit card, but it’s backed by the equity you have in your home. A HELOC starts off with a “draw” period, when you can withdraw funds as you need them and make interest-only payments. After that comes a period of years during which you pay back the principal you’ve borrowed plus interest. Variable interest rates are the norm for HELOCs, so payments can rise unpredictably.
To take out a HELOC, you’ll need a credit score of 680 or higher (700 is even better) and a DTI ratio below 50% (though less than 36% is optimal). You can generally borrow up to 90% of your home equity. If the fluctuations of variable rates don’t bother you, a HELOC may be a good choice for you.
To find out how much monthly payments for a HELOC will be, try a HELOC monthly payment calculator. To calculate how much interest you’ll pay during the “draw” period of a HELOC, consider using a HELOC interest-only calculator.
A cash-out refinance is another way you can access some of the equity in your home. This refi replaces your existing mortgage with a new home loan that’s larger than what you owe. You get the difference in a lump sum, which you pay back, along with the new mortgage, in a single monthly payment, rather than in two separate payments
If you’re looking at the benefits of a cash-out refinance vs. a home equity line of credit, take into account the fact that requirements for borrowing tend to be different. It’s usually less challenging to qualify for a cash-out refi than for a HELOC or home equity loan. Cash-out refinances typically require a minimum credit score of 620 and a DTI ratio of 43% or less. They may have either fixed or variable interest rates.
When you’re considering a home equity loan, it’s important to build a strong credit score, manage your debt-to-income ratio, and secure property insurance, as these factors can affect the rates and terms lenders will offer you. Online tools can help you estimate payments based on the details of a loan and let you compare loans quickly and easily. Keep in mind that if a home equity loan doesn’t feel right, a HELOC or a cash-out refinance might be a better option that still lets you tap your home equity. Be sure to compare lenders and evaluate your options carefully to make sure they’re in keeping with your resources and your goals.
SoFi now offers home equity loans. Access up to 85%, or $350,000, of your home’s equity. Enjoy lower interest rates than most other types of loans. Cover big purchases, fund home renovations, or consolidate high-interest debt. You can complete an application in minutes.
Unlock your home’s value with a home equity loan from SoFi.
You can use a home equity loan for a variety of purposes, from major expenses to home improvements and debt consolidation. The versatility of these loans is a big draw for homeowners. However, it’s important to be sure the loan repayment terms are a good fit for your long-term financial plans.
The monthly payment for a $50,000 home equity loan varies with the interest rate and loan term. For instance, at a 7.00% interest rate across a 15-year term, you’re looking at around $449 per month. But if the interest rate is 8.00% and the term is 20 years, your monthly payment would be approximately $418.
The payment on a $25,000 home equity loan is determined by the interest rate and the loan term. For instance, at a 7.00% interest rate over a 10-year term, you’re looking at a monthly payment of approximately $290. But if the interest rate is 8.00% and you opt for a 15-year term, your monthly payment could be around $239. Online calculators can help you see what payments would be with different variables.
Depending on the loan term and interest rate, the payment on a $30,000 home equity loan can vary. For example, at a 7.00% interest rate over a 10-year term, the monthly payment would be around $348. If the interest rate is 8.00% and the term is 15 years, the monthly payment would be approximately $287. Using a home equity loan calculator lets you plug in different loan terms and rates to see what the payments would be.
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*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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