Disclaimer: The prime rate directly influences the rates on HELOCs and home equity loans.
Key Points
• The rates for home equity loans are influenced by your credit score and debt-to-income ratio, among other factors.
• Borrowers need at least 20% equity in their home to qualify for a home equity loan.
• Most home equity loans have fixed rates, which provide predictable monthly payments.
• It’s smart to shop around and compare offers from different lenders to find the best deal.
• Consider alternatives like a home equity line of credit or a cash-out refinance as well.
Home equity loans are a valuable financial tool for homeowners looking to access the equity in their home. In this article, we’ll delve into the current home equity loan rates, explaining how they are determined and what factors can affect them. We’ll also discuss the benefits and risks of these loans, and provide practical advice on how to qualify for the lowest rates. Whether you’re planning a home renovation, consolidating debt, or funding a major purchase, understanding what a home equity loan is and how rates are set can help you make smart financial decisions.
A home equity loan is a second mortgage — assuming that you are still paying off your first home loan. It uses your home as collateral, providing you with a lump sum that you can use however you wish. The funds are disbursed all at once and you immediately begin repaying what you have borrowed, with interest, in equal monthly installments over five to 30 years. Because they are secured by the equity in your home, home equity loans typically have lower interest rates than unsecured personal loans. The interest rate is usually fixed, meaning your payments are predictable.
To qualify for a home equity loan, you will need at least 20% equity in your home. Many lenders will allow you to borrow up to 85% of that equity. A home equity loan calculator can help you determine what you might be able to borrow.
Recommended: How to Get Equity Out of Your Home
Interest rates for different types of home equity loans are influenced by a variety of factors, including the economic climate and your personal financial situation. The Federal Reserve’s policies and the prime rate help lenders determine, in broad strokes, the rates they will offer. But lenders also take into account each borrower’s credit score and debt-to-income ratio, with higher scores and lower ratios typically leading to more favorable rates. The amount you’re borrowing and the length of your repayment term can also impact the interest rate.
Your interest rate is a big deal when it comes to the affordability of a home equity loan. Even a small change in percentage can add up to significant savings or costs over time. For instance, a $100,000 loan at 8.50% interest would set you back about $985 a month, with a total interest of $77,253 over 15 years. But bump that up to 9.50%, and suddenly you’re looking at a monthly payment of $1,044 and a total interest of $87,960. That’s a more than $10,000 difference in interest alone. So it’s wise to seek out the best possible interest rate and think about how payments fit into your monthly budget and long-term financial goals.
The trends in interest rates for home equity loans can feel a bit like the weather: unpredictable. There are many factors that can influence the rates, but one of the most important is the prime rate. This rate is tied to the federal funds rate, which is set by the Federal Reserve. In recent years, the prime rate has been all over the place. It was as low as 3.25% in 2020 and as high as 8.50% in 2023. These fluctuations can have a direct impact on the rates for home equity loans. While it’s impossible to know for sure what will happen in the future, keeping an eye on the economic conditions can help you time your application for 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% |
To secure the most favorable home equity loan rates, a robust financial profile is key. Before you apply and begin comparing loan offers from various lenders, take these steps.
You need to have at least 20% equity in order to get equity out of your home with a home equity loan. To figure out how much equity you have, simply subtract your mortgage balance from your home’s estimated value (find it on a real estate site). For example, if your mortgage balance is $400,000 and your home is worth $550,000, you have $150,000 in equity. Divide your equity number by the estimated value to arrive at a percentage. The more equity you have, the better your loan terms will be.
Lenders typically favor a credit score of 680 or higher for home equity loans, and many look for 700 or more. A robust credit score is a testament to your financial prudence and can open doors to more attractive home equity loan rates. To bolster your credit score, be diligent about making timely payments, keep your credit card balances in check, and avoid adding new credit accounts in the months leading up to your loan application. Regularly monitoring your credit report for inaccuracies and addressing them can also contribute to a healthier score.
Your debt-to-income (DTI) ratio is a crucial factor in determining your loan eligibility. To learn your number, divide your monthly debts (car loan, student loan, credit card, etc.) by your gross monthly income. For a home equity loan, the DTI requirement is typically below 50%, and ideally below 36%. A lower DTI ratio can lead to more competitive home equity loan rates. To improve your DTI, consider paying down existing debts, increasing your income, or both. This can make you a more attractive borrower and potentially save you money on interest over the life of the loan.
Property insurance is a must-have from a lender’s perspective. This insurance safeguards the lender’s investment in your home in the event of damage. Make sure you’re covered for a range of risks. Having the right property insurance not only helps you secure a home equity loan but also offers peace of mind.
Online tools can help you determine whether you’re prepared to take on a home equity loan and assist you in comparing home equity loan rates from different lenders. Here are some especially helpful 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 closing costs, you’re typically looking at a range of 2% to 5% of the loan amount. These costs often include fees for services such as appraisal, credit report, document preparation, origination, notary, title search, and title insurance.
The interest you pay on a home equity loan used to buy, build, or improve your home may be tax deductible. Those filing jointly can deduct interest on loans up to $750,000; for single filers, it’s up to $375,000. Just remember, in order to take advantage of this deduction, you would need to itemize deduction instead of taking the standard deduction. The tax rules around home equity loans are set to change at the end of 2025, so consult a tax advisor if you’re thinking about this deduction.
Recommended: HELOC Monthly Payment Calculator
If a home equity loan doesn’t seem like the right fit, there are other ways to tap into your equity. A HELOC (home equity line of credit) and a cash-out refinance are two popular options. Both of these options have their own benefits and drawbacks, so it’s important to compare all options to see what’s best for you.
It’s helpful to understand what a home equity line of credit is if you’re thinking about borrowing based on your equity. A HELOC is a bit like having a credit card, but with a lower interest rate. You are given a credit line, with your home as collateral, and can borrow up to a certain limit whenever you want to. During the HELOC’s initial “draw” period, you only pay interest on the amount of the credit line you actually use. (Use a HELOC interest-only calcutor to see what payments might be based on your balance.)
After the draw period, often 10 years, you repay what you have borrowed with interest. HELOC interest rates are variable and can change with the market, so it’s important to be mindful of potential cost increases. To qualify for a HELOC, lenders typically look for a minimum credit score of 680 (though 700 is preferred) and a debt-to-income ratio below 50% (with 36% being the ideal). This type of loan is great for those who have fluctuating borrowing needs over time. Usually, you can borrow up to 90% of your home’s equity, offering more flexibility than a traditional loan. The chart below will show you some key differences in a HELOC vs. a home equity loan.
A cash-out refinance is a special type of mortgage refinance that replaces your existing mortgage with a larger one, giving you a lump sum based on your home’s equity. Typically, lenders allow you to borrow up to 80% of your home’s value. The requirements are a minimum 620 credit score and a DTI ratio of 43% or less. You can choose between fixed or variable interest rates, with the latter potentially offering access to more equity. One plus of a cash-out refi is the consolidation of two payments (mortgage plus home equity loan) into one.
Below, a quick guide to a cash-out refinance vs. a home equity line of credit and a home equity loan.
| 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) |
Home equity loans can help you unlock your home’s equity for significant expenses, such as home improvements, or allow you to consolidate debt. But they also come with risks. If you miss payments, you could face foreclosure. To get the best home equity loan rate, focus on building a strong credit score, managing your debt-to-income ratio, and making sure you have enough property insurance. Shop around and check rates at multiple lenders to find a loan that aligns with your long-term financial 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.
The monthly payment for a $50,000 home equity loan varies with the interest rate and the term of the loan. At 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.
As with any loan, the monthly payment amount depends on the interest rate and loan term. Assuming you have 20 years to repay $100,000, with interest, here is the monthly payment amount for a fixed-rate loan at different interest rates: A rate of 7.00% would be $775. At 8.00% you are looking at a payment of $836. And at 9.00%, you can expect to pay $900.
There are a few things that might prevent you from securing a home equity loan, such as not having enough equity in your home, or having a less-than-ideal credit score or a high debt-to-income ratio. Lenders typically look for at least 20% equity in your home and a credit score of 680 or higher. A debt-to-income ratio over 50% is certainly a red flag, and the closer your DTI ratio is to 36%, the better. A history of late payments or a recent foreclosure could also work against you.
Home equity loans have their perks, like a fixed interest rate and monthly payments you can count on. They’re perfect for big-ticket items such as home improvements, debt consolidation, or a major purchase. With your home as collateral, you’ll often snag a lower interest rate compared to unsecured loans, which can translate to significant savings over time. Plus, if you’re using the loan for qualifying home improvements, you might be able to deduct the interest on your taxes.
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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.
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