Home equity rate calculator: Know the home equity loan rates

How does a home equity rate calculator work?

Just answer some basic questions regarding your home equity needs. Within minutes, you'll be able to see the most competitive home equity rates available — from the best loan lenders — that match your criteria. You can then compare all your loan options side by side.

Home equity loan

This type of home loan is where you borrow money against your home equity (your home's value minus the amount you still owe on the mortgage). But, unlike a home equity line of credit or a HELOC loan, here, you get a lump sum. Generally, you can borrow up to 80 percent to 85 percent of your home's total value. Your loan amount will depend largely on how much equity you have in your home, your financial situation, and other factors.

Home equity loans typically have fixed interest rates. The repayment periods are usually between five and 30 years. However, keep in mind that since the loan is secured by your home, it does put your asset at a risk. Like any home loan, a lender can foreclose on your house if you fail to make the scheduled monthly payments.

The loan process

After you apply for the loan, the lender will review your loan application and check your credit score. This step determines your loan amount, the home equity interest rate, your monthly payment, the loan term, and fees. The financial institution will give you the funds in one lump sum once you agree to the loan terms. The loan is then repaid in predetermined monthly loan payments.

Calculating home equity

Calculating how much equity you have is done by dividing the amount you owe on the house by your home's value. For example, if you have a house worth $400,000 and you owe $200,000. Your home equity is $200,000 / $400,000 = 0.50 or 50 percent loan to value (LTV). That is to say, you have 50 percent equity in your home. Once you have that number with you, you can compare it with any lender's maximum LTV ratio. That will tell you if you qualify for a home equity loan or not.

How much money can you borrow?

If you want to calculate how much funds you can borrow, all you have to do is multiply your home's value by the lender's maximum LTV and subtract your mortgage balance. Let's take an example of a case where your lender has an LTV of 85 percent of your home's value, you have a house worth $400,000, and your home mortgage balance is $200,000.

The calculations will be:
$400,000 x 0.85 = $340,000
$340,000 - $200,000 = $140,000

This is the maximum loan amount you may be eligible for.

Reasons for a home equity loan

You may use the funds for a lot of reasons — be it debt consolidation, large-scale home improvement projects, or to pay for higher education. In fact, as a borrower, you can use home equity loans for almost anything. Of course, you need to be careful about what you use the loan money for.

Some of the ways to make the most of your home equity loan are:

• Home improvements that add to your home's value. In fact, if the money is used for value-adding renovations, that is considered an increase in the cost basis of the house, and the loan interest is usually tax deductible.
• To pay for higher education, home equity loan rates are generally lower than those of student loans.
• Debt consolidation such as paying off your credit card bills so that you can get your finances on track. Home equity loan interest rates are often a tiny fraction of the interest rates that credit card companies charge.
• To cover emergency expenses.
• To make investments for the betterment of your financial portfolio.

Pros and cons of home equity loans

A home equity loan is a good idea if you know how much money you'll need. You can get the required funds in one lump sum. Besides, home equity loans offer competitive interest rates (much lower than credit cards, personal loans, or cash-out refinances). However, this loan type has advantages as well as disadvantages. For instance, a home equity loan may not be the ideal solution if you need money quickly as receiving funds can take longer. Plus, you may have to incur expensive closing costs.

Let's look at the complete picture by weighing the pros and cons of this type of secured loan.

Applying for a home equity loan

Before you apply for a home equity loan, make sure you meet all the loan requirements. Check your credit score, calculate your total debt, and know your home equity. Once that is done on your part, you can begin the loan application process by entering your personal as well as financial information.

Information requirement

When applying for a home equity loan, you'll need the following documents:

• Social Security Number
• Details of any child support or alimony
• Employment history and contact information of the employer
• Tax returns and recent pay stub as evidence of your income
• Last two W-2 statements
• Proof of home ownership, mortgage, and existing liens
• Home insurance
• Home appraisal

Home equity loan costs/fees

Depending on the type of loan it is, your credit, and the lender you're taking the loan from, your closing costs as well as fees will vary. Some of the most common costs at the time of signing for a loan include:

• Loan origination fee
• Final closing costs
• Prepayment penalty
• Title insurance
• Property insurance and taxes

Getting home equity loan with bad credit

If you have a bad credit score, your loan approval may be harder to get, but it's not impossible. Keep in mind that most lenders require you to have a minimum credit score of 620. That's why it's important that you shop around for lenders who are more accepting of a poor credit, although, they will typically offer you higher home equity loan rates. Also, getting a co-signer may increase your loan approval chances and reduce your interest rate.

There are some other criteria apart from your credit score that can qualify you for a home loan. These include:

• Minimum of 15 to 20 percent home equity
• A low debt-to-income ratio (ideally, less than 43 percent)
• A history of timely bill payments
• Stable income or employment history

Home equity loan vs. HELOC

While there is similarity between home equity loans and HELOCs, as both loan types use your home as collateral, there are significant differences too. The most marked difference is that a home equity loan has a fixed interest rate and gets you funds in a lump sum while a HELOC has a variable interest rate, and lets you draw from a credit line — during a draw period.

Generally speaking, if you have poor credit due to missed payments, a home equity loan that allows for a structured monthly budget (with predictable interest rate and monthly payments) is the better option for you. If you're looking for a flexible timeline to pay back your loan, a HELOC is a better choice.

Home equity loans during Coronavirus

Keeping the current state of economy in mind, a home equity loan may be advantageous if you're looking for some emergency cash. According to Bankrate Chief Financial Analyst, Greg McBride, the rising home prices (and hence a higher home equity) are making lenders more open to the idea of opting for home equity loans. Additionally, there are many prequalification offers for those who're looking for such loans. Another advantage is that there are good loan relief options for those who're facing financial hardship.

Best home equity loan rates this year

According to loan experts Bankrate, there are a variety of loan lenders who offer loans against your home's value. Some of the best lenders offering good home equity loan rates (between 3 percent to 12 percent) and lower fees over the life of a loan include:

• Discover for lowest rates
• BMO Harris Bank for providing different loan options
• KeyBank for homeowners with limited home equity
• Spring EQ for quick funding
• Flagstar Bank for offering flexible loan terms
• U.S. Bank for being a national bank that offers loans with low fees
• Third Federal for excellent customer support
• Frost for being a regional bank that has low fees
• Connexus Credit Union for a good branch network
• Regions Bank for a good overall customer experience

Key takeaway

When you're looking for a loan — whether a home equity loan, a HELOC, or a personal loan, you must evaluate your reasons for the loan. Make sure you have a good repayment plan in mind or else it may rack up more debt for you in the long run.

Also, keep in mind that before you apply for a loan, you must take some time to improve your credit score.