Disclaimer: The prime rate directly influences the rates on HELOCs and home equity loans.
Key Points
• Birmingham’s home equity loan rates tend to follow the prime rate, but also take cues from a borrower’s personal financial position.
• If you want to aim for the best rates out there, keep your credit score at 680 or above, and your debt-to-income ratio below 36%.
• Home equity loans offer fixed monthly payments over a 5- to 30-year term, typically with lower interest rates than unsecured loans.
• Risk of foreclosure should be a significant consideration if you’re thinking about taking out a home equity loan.
• The interest on home equity loans may be tax-deductible if funds are used for home improvements.
Welcome to our guide to home equity loan rates in Birmingham, Alabama. We’ll do a deep dive into home equity loans, explaining just how they work, what factors influence their interest rates, and how you can qualify for the very best rates. Whether you’re looking to fund improvements to your home, consolidate debt, or cover another major expense, understanding home equity loan interest rates can help you make informed financial decisions.
Before you apply, you should know the basics about what a home equity loan is. It’s a second mortgage that uses your home as collateral, providing a lump sum of money you can use for any purpose. You’ll begin repaying it immediately in equal monthly installments over a fixed term of five to 30 years. Because your home is the collateral for the loan, you’ll generally get a lower interest rate than you would with an unsecured personal loan. (This also means your home is at risk if you miss payments.) Most home equity loans have a fixed interest rate, so your payments will be predictable.
To qualify, you’ll need to have at least 20% equity in your home. Some lenders may allow you to borrow up to 85% of your equity. A home equity loan calculator can help you determine your home equity and how much you might borrow against it.
Interest rates on different types of home equity loans are influenced by both the economic environment and your financial situation. Federal Reserve policies — including changes to the federal funds rate — can send ripples through the lending market, causing changes that impact the prime rate. When the prime rate moves up or down, so do home equity loan rates.
As with your original home loan, your credit score and debt-to-income (DTI) ratio will also drive the rates you’re offered. And the loan amount and repayment term affect the interest rate you get, too. Competitive pressures among lenders can also lead to rate reductions.
Understanding these factors will help you make informed decisions when you’re looking at options for how to get equity out of your home.
Your interest rate can really be a game-changer when it comes to the affordability of your loan in the long term. Let’s say you secure a $100,000 home equity loan with a 15-year repayment term. At an 8.50% interest rate, you’d have a $984 monthly payment and $77,253 in total interest by the time you pay it off. Bump the interest rate up to 9.50%, and you’ll be looking at a $1,044 monthly payment and $87,961 in total interest. That’s $10,700 in additional interest for a 1% rate difference!
Here are more examples of how your loan term and rate could affect your 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 |
As you think about how to tap your home equity, you’ll probably consider the possibility of timing your loan application to achieve the lowest possible rate. Predicting the prime rate is a bit like forecasting the weekend weather — you could be wrong, or it could just turn on a dime.
Don’t beat yourself up if you can’t hold off on applying until rates are at their lowest. If you need a loan, focus on comparing offers from different lenders to get the best possible rate.
The prime rate has seen its fair share of ups and downs, as you can see from this graphic.
The answer is, quite a lot, when you look at its movement over decades. The prime rate has seen its fair share of ups and downs, as you can see from the graphic and chart. It is not always predictable, and a drop is not necessarily in the near future at any given moment.
Since 2018, the prime rate has seen its share of ups and downs, ranging from a low of 3.25% in 2020 to a high of 8.50% in 2023. Take a look at the history of the prime rate to get a sense of how high or low it may go this year.
Source: TradingView.comSince 2018, the prime rate has seen its share of ups and downs, ranging from a low of 3.25% in 2020 to a high of 8.50% in 2023. Take a look at the history of the prime rate to get a sense of how high or low it may go this year.
| 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% |
If you take the following steps before beginning the application process, you’ll be better positioned to land a home equity loan with rates and terms that are manageable and beneficial.
You need to have at least 20% equity in your home to qualify for a home equity loan, and you can calculate what you’ve got with a simple equation. Subtract your outstanding mortgage balance from the estimated value of your home, then divide the answer by your home’s estimated value. You’ll arrive at the percentage of equity you now possess. Higher is always better.
A robust credit score also helps you land the best home equity loan rate. Lenders look for a score of 680 or higher, and many require a score over 700. Higher credit scores can easily open doors to more favorable loan terms. Focus on making timely payments, reducing credit card balances, and steering clear of new debt. Your chances of qualifying for a home equity loan with a favorable interest rate will increase.
Another important factor is your DTI ratio. Lenders typically prefer to see a DTI ratio of 50% or less, and love one that’s 36% or lower. Managing your DTI effectively can help you qualify for lower interest rates, so work on paying down your existing debt, increasing your income, or both.
Insurance on your property is a must-have for a home equity loan. This insurance safety-net protects you and your lender should damage occur. Coverage must be active and adequate.
Taking steps to borrow against your home? You might want to run hypothetical numbers so you’ll understand what borrowing opportunities are available to you, and what you can expect to spend on your payments. A home equity loan calculator and other online tools make that math easy for you. Here are some we use often.
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.
You’ll pay about 2% to 5% of the loan amount in closing costs when you receive your money. This table details typical fees, what they are and what they cost.
| Service | Typical Fees |
|---|---|
| Appraisal | $300-$500 |
| Credit report | $30-$50 or more |
| Document prep | $100-$500 |
| 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 |
An occasional lender will offer no-closing-cost loans, but these frequently carry higher interest rates.
Interest you pay on a home equity loan may be tax-deductible if you use the funds to pay for improvements on the home you borrow against. A single filer can deduct interest on the first $375,000 of loan debt. Married couples filing jointly can deduct interest on up to $750,000 of debt. You’ll need to itemize your tax return if you want to take advantage of the writeoff. For timely information on how it applies to you, consult with your tax advisor.
Home equity loans are a desirable option for many, but you can find other ways to borrow against your equity, including a home equity line of credit (HELOC) or a cash-out refinance. Let’s take a look at these other options, which you may have already heard of.
What is a home equity line of credit? A HELOC is sort of a credit card with a picture of your home on it. It’s a flexible loan that lets you borrow up to a certain limit and — in the initial “draw” period — pay interest only on the amount you take. A HELOC is unique in that it offers homeowners the freedom to borrow a potentially large amount of money, but pay interest only as they use it.
Usually, in the draw period, the borrower is free to withdraw the funds they need. When the repayment period begins, they pay back both principal and interest. Rates on HELOCs are usually adjustable. If you’re comparing a HELOC vs. a home equity loan, a HELOC is focused on offering the borrower more flexibility. But keep in mind that with its adjustable interest rate, the payment amount may fluctuate.
Qualifying for a HELOC often requires a credit score of 680 or higher (700 or more even better) and a DTI ratio under 50% (ideally below 36%). HELOCs frequently permit you to borrow up to 90% of your home’s equity. Check out this HELOC repayment calculator, which can help you see how the loan would look as you pay it down. A HELOC interest-only calculator can tell you how much interest you’ll pay during the “draw” period of a HELOC.
Often referred to as a cash-out refi, this special kind of mortgage refinance lets you replace your existing mortgage with a new, larger one. You then receive the difference in cold, hard cash, and use it as you wish. The amount you can cash out is determined by your accrued home equity, with most lenders letting you borrow up to 80% of it. It’s standard for lenders to require a credit score of 620 or above and a debt-to-income ratio below 43% to qualify.
The beauty of a cash-out refi is that you often get to choose between a fixed rate or a variable one. Below is a quick guide to help you compare a home equity loan vs a cash-out refinance vs a home equity line of credit:
| Home Equity Loan | HELOC | Cash-Out Refinance | |
|---|---|---|---|
| Borrowing Limit | Up to 85% of borrower’s equity | Up to 90% of borrower’s equity | 80% of borrower’s equity for most loans |
| Interest Rate | Fixed | Generally variable | May be fixed or variable |
| Type of Credit | Installment loan: Borrowers get a specific amount of money all at once that they then immediately begin repaying, with interest, in regular installments. | Revolving credit: Borrowers receive a line of credit. They have a draw period (5-10 years) during which they borrow and can only pay interest, followed by a repayment period (10-20 years) to repay the principal plus interest. | Installment loan: Borrowers receive a lump sum payment from the excess funds of their new mortgage, which has a new rate and repayment terms. |
| Repayment Term | Generally 5-30 years | A draw period of 5-10 years, followed by a repayment period of 10-20 years | Generally 15-30 years |
| Fees | Closing costs (typically 2-5% of the loan amount) | Closing costs (typically 2%-5% of the loan amount), plus other possible costs, depending on the lender (annual fees, transaction fees, inactivity fees, early termination fees) | Closing costs (typically 2-5% of the loan amount) |
To get the best home equity loan rates in Birmingham, build your credit score, lower your debt-to-income ratio, and secure reliable property insurance. Use online tools to estimate your payments and the amount you can borrow, being sure to factor in closing costs. If a home equity loan isn’t the best fit, a HELOC or a cash-out refinance could also be an option for you. Weigh the benefits and risks of each to find the one that works best for your situation.
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.
Reasons why people apply for home equity loans include to pay for home improvements and to consolidate high-interest debt. If you decide to pursue a home equity loan, remember to use the funds wisely.
The amount of your monthly payment for a $50,000 home equity loan would vary depending on the interest rate and loan term. If you got your loan at 7.00% interest over 15 years, for example, your monthly payment would be about $449. At a 9.00% interest rate over 15 years, the payment would be around $507. Loan calculators can help you figure out what monthly payments would be required, depending on the variables.
Several issues could get in the way when you try to secure a home equity loan. First, lenders typically require a minimum credit score of around 680 or more; if yours is lower, it could disqualify you. A high DTI ratio – above 50% – might also push your loan out of reach. And if you have less than 20% equity in your home, it could be a red flag for lenders, too. Lenders like to look at your home value’s stability, and how comprehensive your property insurance is. Qualifications vary by lender, but these are common disqualifiers.
Home equity loans often carry fixed interest rates. They therefore have predictable monthly payments, which make budgeting a bit easier. They also tend to have lower rates than unsecured personal loans, making them cost-effective for significant one-time expenses like home improvements or debt consolidation. Be sure to balance these benefits with potential risks — the threat of foreclosure on your home if you fall behind on payments, for one.
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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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