Disclaimer: The prime rate directly influences the rates on HELOCs and home equity loans.
Key Points
• Home equity loan rates are influenced by the prime rate and each borrower’s financial profile.
• Even a one-percentage-point difference in rates can lead to thousands of dollars in savings or to higher interest payments.
• Home equity loans usually come with fixed interest rates, while a home equity line of credit offers variable rates.
• If you’re after the most favorable rates, set your sights on a credit score of 700 or higher and a debt-to-income ratio under 36%.
• The interest on home equity loans could be tax-deductible if funds are used for significant home improvements.
Home equity loans are a powerful financial resource for homeowners who want to get equity out of their home without selling the property. In this guide, we’ll delve into home equity loan rates, detailing how they’re calculated and what variables can influence them. You’ll learn how to examine rates, see the upsides and downsides of these loans, and find out about alternative options. Armed with this knowledge, you’ll be better equipped to make smart financial choices.
Let’s begin by understanding what a home equity loan is in more detail.
Recommended: What Is a Home Equity Line of Credit?
A home equity loan is a second mortgage that uses your home as collateral, providing a lump sum that you can use for various purposes. Many people borrow against their home to cover renovations or education expenses, or to access funds to pay off higher-interest debt. The funds you borrow will be disbursed all at once and you’ll begin repaying the loan immediately, plus interest, in equal monthly installments over five to 30 years. Because the loan is secured by your home, rates are typically lower than unsecured personal loans. This means that missed payments could put you at risk of foreclosure.
To qualify, homeowners should have at least 20% equity in their primary residence. Many lenders allow borrowing up to 85% of this equity. Qualifying for a home equity loan is similar to getting a typical home loan. You should shop around and get rate quotes from various lenders. The lenders will be sizing you up too, looking at your credit score, debt levels, and other factors. If you want to get a preview of what loan you might be able to qualify for, try plugging your numbers into a home equity loan calculator.
Interest rates on different types of home equity loans are influenced by a variety of economic and individual factors. The Federal Reserve’s policies influence the prime rate, which in turn plays a significant role in the rates lenders set. But the lender’s basic rate is only a starting point. Additionally, a borrower’s credit score and debt-to-income (DTI) ratio are influential in determining the precise interest rate they will be offered.
Loan amount and repayment term also come into play; generally, larger loan amounts and longer terms mean higher rates due to the increased risk for the lender. Understanding these factors can help you make informed decisions about your home equity loan rates.
Interest rates are a big deal when it comes to the overall cost of your home equity loan. Even a seemingly small difference in rates can add up to significant extra payments over time. Consider this: a $100,000 home equity loan with a 15-year repayment term. At 8.50% interest, your monthly payment would be $985, with a total interest payment of $77,253. But at 9.50%, the monthly payment jumps to $1,044, and the total interest paid increases to $87,960. That’s a $10,700 difference in interest over the life of the loan. It’s clear that nabbing the best home equity loan rates is a smart move.
Predicting interest rate movements is like trying to forecast the weather — there are many factors at play. However, by examining recent trends and tuning into the news, you can glean valuable insights. Watch the prime rate. This pivotal marker for home equity loan rates has been on a rollercoaster, plummeting to 3.25% in 2020 and then rising to 8.50% in 2023. These fluctuations ripple through the rates you encounter in Portland, so keeping an eye on the prime rate can help you secure the best deal.
| 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% |
To obtain the most attractive home equity loan rates, your credit score and DTI ratio are key. Try to fine-tune these and other factors by taking a few steps before filing your first loan application.
You need at least 20% equity in your home to be eligible for a home equity loan. To figure out your equity, simply subtract your outstanding mortgage balance from your estimated home value. Then divide the answer by the estimated home value to arrive at a percentage of equity. The higher it is, the better off you’ll be.
To land the most competitive home equity loan rates in Portland, you’ll want a credit score of 680 or higher. Lenders will be looking at your payment history, credit utilization, and the length of your credit history. Make a habit of paying your bills on time and keeping credit card balances in check. Hold off on opening new credit accounts or closing old ones in the months before you apply.
Your DTI ratio is an important metric when you’re trying to secure a home equity loan. Most lenders look for a DTI ratio under 50%, with an ideal target of 36% or lower. To determine your number, add up all your monthly debt payments and divide by your gross monthly income. A lower DTI ratio is a sign to lenders that you’re in a good position to handle monthly loan payments. To improve your ratio, consider paying down existing debts, boosting your income, or even a combination of both. A well-managed DTI could lead to more favorable rates and terms for your home equity loan.
Property insurance is usually a must-have for home equity loans. This insurance is a safety net for both you and the lender should any damage occur. Make sure your coverage is up to snuff.
A home equity loan calculator can give you a ballpark figure of your monthly payments based on the loan amount, interest rate, and term. And that’s just one of the calculators you might find useful as you explore home equity lending. Check out these tools:
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.
Closing costs are part of the loan process, just as they were when you bought your house. Home equity loan closing costs and fees typically range from 2% to 5% of the loan amount. Included are fees for the appraisal, credit report, document preparation, loan origination, notary, title search, and title insurance. Always compare fees when you look at loan offers; they can vary greatly from lender to lender.
Here’s a tip: The interest on home equity loans could be tax-deductible if you’re using the funds to buy, build, or significantly improve your home. This tax perk is good through 2025, and there’s a chance it might stick around. If you’re married and filing jointly, you can deduct interest on home equity loans up to $750,000; for single filers, it’s up to $375,000. Remember, to claim this deduction, you’ll need to itemize your tax return. If you’re not sure how this applies to you, a quick chat with a tax advisor can help you understand the benefits you might be missing.
While a home equity loan is a common choice, there are other options to explore, including a home equity line of credit (HELOC) and a cash-out refinance, which is a special kind of mortgage refinance. Let’s take a closer look at both:
A HELOC is like a credit card guaranteed by your home. It’s a flexible way to borrow what you need, when you need it. You’ll pay interest only on the portion of the credit line that you actually use. During the HELOC’s “draw” period, usually 10 years, you likely won’t have to pay down the principal unless you want to do so. (A HELOC interest-only calculator can allow you to see what it would cost to just pay interest during this period.)
After the draw period is the repayment period, when you repay all that you owe, with interest. One key difference between HELOCs and home equity loans: HELOCs tend to have a variable interest rate. So monthly payments aren’t always the same amount. You can put your balance and current rate into a HELOC monthly payment calculator, and it will give you a sense of what you might owe.
To qualify for a HELOC, a credit score of 680 is a common benchmark, but aiming for 700 is even better. Keep your debt-to-income ratio under 50% — and ideally, under 36%. Most lenders will let you borrow up to 90% of your equity.
A cash-out refinance replaces your current mortgage with a larger one, giving you a lump sum based on your home equity. Most lenders will let you borrow up to 80% of your equity. With a credit score of 620 or above and a DTI ratio under 43%, you could choose a fixed or variable interest rate. Unlike home equity loans, cash-out refinances consolidate your debt into one monthly payment. They’re generally easier to qualify for than home equity loans or HELOCs, making them an attractive option for homeowners. If you’re considering a refinance, you’ll just want to compare the costs to what you would pay if you stuck with your original mortgage. If you have a very low rate on your current loan, refinancing might not be the best option.
Here’s a quick look at a HELOC vs. a home equity loan and a cash-out refinance.
| 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 HELOC 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) |
When you’re considering a home equity loan in Portland, it’s important to understand the factors that can influence the rates you’re offered. Having a strong credit score, a manageable DTI ratio, and good property insurance coverage can help you qualify for better rates. Of course, you’ll want to explore alternatives like a HELOC and a cash-out refinance to find the best option for your finances. Whatever type of loan you choose, it’s a good idea to get quotes from multiple lenders to find the most attractive rate possible.
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.
Home equity loans are incredibly versatile and can be used for a variety of purposes, such as making a major purchase, financing home improvements, or consolidating high-interest debt. However, make sure to handle the funds with care and run the numbers so that the monthly payments fit comfortably in your budget.
The monthly payment for a $50,000 home equity loan varies with the interest rate and the term of the loan. With an 8.00% interest rate, for instance, a 10-year loan would have a $607 monthly payment. Choose a 20-year term, and that monthly amount drops to about $418. Consider your budget and goals to pick the term that suits you best.
During the draw period, which can last up to 10 years, you pay only the interest on the amount you’ve borrowed. So if you used $50,000 of your $100,000 credit line and had a 5.00% interest rate, your monthly interest-only payment would be around $208. But if you borrowed the entire $100,000 at 5.00%, you would owe $417 per month during the draw period. Keep in mind that HELOC interest rates are variable, so exact monthly payment amounts would vary, too.
There are a few factors that could prevent you from obtaining a home equity loan. Lenders often look for a minimum credit score of 680. A high DTI ratio, typically over 50%, might raise concerns. Home equity of less than 20% could also be a barrier. Take steps to address these issues before applying to boost your chances of approval.
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Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.
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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.
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