Disclaimer: The prime rate directly influences the rates on HELOCs and home equity loans.
Key Points
• Home equity loan rates are influenced by the Federal Reserve’s monetary policy, plus the borrower’s creditworthiness.
• It’s a smart move to compare rates from multiple lenders in order to find the best deal and terms.
• By boosting your credit score and reducing your debt-to-income (DTI) ratio, you could see the rates you’re offered drop.
• You’ll need at least 20% equity in your home to qualify for a home equity loan.
• Choose fixed rates for predictable monthly payments or adjustable rates for flexibility.
• Interest on home equity loans might be tax-deductible if you use the funds to pay home-related expenses.
What is a home equity loan? First and most important, it’s a great way for homeowners to access the value they’ve built in their homes. It’s also an option many people who’ve built equity use to relieve pressure when they’re in need of cash.
In this article, we’ll cover everything you should know about home equity loans. We will discuss factors that affect loan rates and give you tips for getting the best rate possible. We’ll also explain the different types of home equity loans, including home equity lines of credit (HELOCs) and cash-out refinances, so you’ll be aware of the alternatives available, along with the pros and cons of each.
Whether you are planning a home renovation, working to consolidate high-interest debt, or making a major purchase, understanding home equity loan rates in Plano can help you make smart financial decisions and set you up for a successful economic future.
A home equity loan is a second mortgage, assuming you’re still paying off your original mortgage. It allows you to tap into your home’s equity and receive a lump sum of cash, which you immediately begin repaying, usually in fixed monthly installments, over five to 30 years. The loan is secured by your home, which means you’ll have access to lower interest rates than you would get with an unsecured personal loan.
One important thing you should keep in mind: In order to draw on the equity in your home, you have to actually have equity in your home. You can still be working on paying off your mortgage, but the money you currently owe shouldn’t be more than the house is worth. Typically, lenders will want you to have a minimum of 20% equity in your home in order to qualify.
A HELOC vs a home equity loan is where many homeowners begin their comparisons to find the right loan. Here’s how these two types of loans compare if you use them to pull equity from your home. A home equity loan’s interest rate is often fixed, giving you the peace of mind that comes with predictable payments.
| HELOC | Home Equity Loan | |
|---|---|---|
| Type | Revolving line of credit | Installment loan |
| Interest Rate | Usually variable-rate | Usually fixed-rate |
| Repayment | Repay only what you borrow plus interest; you may have the option to make interest-only payments during the draw period. | Starts immediately at a set monthly payment |
| Disbursement | Charge only the amount you need | Lump sum |
If you’ve been paying down your mortgage diligently and are wondering just how to get equity out of your home, a home equity loan may be the right option for you.
Interest rates on different types of home equity loans are influenced by the economic environment and your financial situation. The Federal Reserve’s monetary policy has a big impact on the lending market in general. Lenders typically tie home equity loan rates to the prime rate, which can be influenced by Federal Reserve policies.
Changes in the prime rate are known to lead to adjustments in home equity loan rates. As with your original home loan, your credit score and debt-to-income (DTI) ratio also drive the rates you’re offered. Additionally, the loan amount and repayment term can affect the interest rate you get. Competitive pressures among lenders can also lead to rate reductions. Understanding these factors can help you make informed decisions about a home equity loan.
Your interest rate is a game-changer when it comes to the affordability of your loan over the long term. 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 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 1.0% 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’re thinking about how to tap the equity you have in your home, 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 trying to forecast the weather, unfortunately, and not every borrower has time to wait for a desirable turn.
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.
| 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% |
The answer is, 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 above. It is not always predictable, and a drop is not necessarily in the near future at any given moment.
To secure the most competitive home equity loan rates in Plano, you should keep a few factors in mind. 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 not just favorable, but hopefully manageable and beneficial.
This is a simple equation: you need to have at least 20% equity in your home to qualify for a home equity loan. To figure out what your level of equity is, simply subtract your outstanding mortgage balance from the estimated value of your home. Now, divide that answer by the estimated home value, and you’ll arrive at a percentage of equity that you now possess. The higher it is, the better off you’ll be.
A robust credit score is needed to land the best available home equity loan rate. Lenders often look for a score of 680 or higher, and many require a score over 700. Higher credit scores are a sign of financial savvy and can open doors to more favorable loan terms. Focus on making timely payments, reducing credit card balances, and steering clear of new debt to up your chances of qualifying for a home equity loan with a favorable interest rate.
Your DTI ratio is an important factor when it comes to qualifying for a home equity loan and getting a good rate. Lenders typically prefer to see a DTI ratio of 50% or less, and 36% or lower can help you qualify for lower interest rates. To manage your DTI effectively, work on paying down your existing debt, increasing your income, or a combination of both.
Insurance on your property is a must-have for a home equity loan. This insurance safety-net protects both you and the lender should damage occur. Make sure your coverage is active and adequate.
Before you take the steps to borrow against your home, you might want to do a little math to understand what borrowing opportunities will be available to you, and how much you can expect to spend for loan payments in the future. A home equity loan calculator and other online calculators can make that math a cinch for you. Here are some useful ones.
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 the closing costs on a home equity loan, you’ll pay a ballpark figure of 2% to 5% of the loan amount. The table shows some typical closing costs that borrowers encounter.
| 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 |
Some lenders offer no-closing-cost loans, but those frequently come with higher rates, so be sure to calculate what you’ll pay over the life of the loan before signing up.
The interest on your home equity loan may be tax-deductible if you use the funds to improve your home. Single filers can deduct interest on the first $375,000 of loan debt. Married couples filing jointly can deduct the interest on up to $750,000 of debt. But you’ll need to itemize on your tax return if you want to take advantage of this writeoff. For the most up-to-date information, consult with a tax advisor, who can help you figure out what will make the most sense for your situation.
Home equity loans aren’t the only way you can leverage your home’s value. You might also want to consider a home equity line of credit (HELOC) or a cash-out refinance. With a HELOC, you apply for a credit limit you can borrow against as needed, secured by your home. You pay interest only on the cash you pull out. A cash-out refinance, on the other hand, involves taking out a new mortgage for a larger sum than your existing home loan and receiving the difference as a lump sum.
Learn more about cash-out refinance vs. home equity line of credit
What is a home equity line of credit A HELOC is a lot like a credit card, offering homeowners the freedom to borrow up to a set limit, paying interest solely on what you use. Usually, you can withdraw funds during an initial “draw” period, followed by a repayment period in which you must repay the principal and interest. Rates on HELOCs are generally adjustable.
Unlike a home equity loan, a HELOC is all about flexibility. Keep in mind, though: Adjustable interest rates mean that your rate and your payments can fluctuate, potentially impacting costs down the line. Qualifying for a HELOC generally requires a credit score of 680 or higher (700 is better) and a DTI ratio that is ideally below 36% (but at most under 50%). HELOCs often allow you to borrow up to 90% of the equity you have in your home.
Wondering how much the monthly payments for a HELOC would cost? Experiment with a HELOC monthly payment calculator. And if you’d like to calculate how much interest you’d have to pay during the “draw” period of a HELOC, try out a HELOC interest-only calculator.
A cash-out refinance is a strategic mortgage refinance. You swap your original mortgage for one that’s larger than what you owe — then receive the difference in a lump sum. Rates on cash-out refis may be fixed or adjustable.
It’s worth noting that it’s usually easier to qualify for a cash-out refi than a home equity loan or a HELOC. Lenders have different standards, but often, cash-out refinances require a minimum credit score of 620 and a DTI ratio of 43% or less.
If you are thinking about applying for a home equity loan in Plano, it’s wise to grasp the key drivers of interest rates. Your credit score, DTI ratio, and equity level all play a role. But simply shopping around can help you get the best available rate. And if a home equity loan isn’t a fit, remember that HELOCs and cash-out refinances have their own unique benefits.
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.
Versatile home equity loans can serve as a funding source for major expenses, home improvements, or consolidation of high-interest debt. The loans’ adaptability makes them a valuable resource for any homeowner who needs a substantial sum but isn’t ready to part with their property.
A borrower’s monthly payment on a $50,000 home equity loan will depend on both the loan term and the interest rate. For instance, a 15-year fixed-rate loan at 7.50% would mean a monthly payment of about $464. Opting for a 30-year term at that same rate would lower the monthly payment to roughly $350. The longer the loan’s term, however, the more total interest you’ll pay.
A $100,000 home equity line of credit would likely come with a variable interest rate. During the draw period, you might need to pay interest only, just on the funds you use. Once the draw period concludes, you’ll start repaying both the principal and interest. If you were to repay the full $100,000 over a 20-year period, and the interest rate held steady at 8.00%, your monthly payment would be $836. But remember, the variable rate makes it hard to predict payments down the line.
Home equity loans offer a fixed interest rate, so your monthly payment amount is predictable. Because a home equity loan is secured by your home, it will typically come with a lower interest rate than a personal loan, which is generally unsecured. Plus, the interest you pay may be tax-deductible as long as the funds you borrow are used for major home improvements (consult a tax advisor to be sure).
SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
*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.
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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