Home Equity Loan Interest Rates First Time Homeowners Should Expect
Home equity loan interest rates are primarily based on your personal credit score. As a new homeowner, you may find your rates are similar to those quoted for other, veteran home owners. However, you may also see your rates are higher if your credit history is still less established or your debt to income ratio is considered to be high. Ultimately, a home equity loan interest rate is typically higher than your mortgage rate, but should be comparable to your credit card rates.
First Time Homeowners and Credit
First time homeowners tend to have established credit, meaning their credit scores are likely over 700 to 750, and they have no major defaults or delinquencies. Homeowners have good credit because it is a prerequisite to secure most mortgage loans. Even a first time home buyer with a low down payment or low income will be expected to have a clean credit report prior to securing a first mortgage. Home equity lenders use the equity you have in your home as collateral on the loan, further reducing the need for very high credit to get a good rate. This means most homeowners will be able to secure moderate rates, but some will face challenges if they have too much debt in their name.
First Time Homeowners and Debt to Income Ratio
Many first time homeowners make the common mistake of taking on too much debt. Lenders provide for low down payment loans or extended repayment periods, but this is not always the best option for a borrower. If you elected these options in order to get into your first house, you may find you have far too much debt on record to qualify for additional loans. Your income and asset base must grow a bit before you can start paying debt again. If you seek a home equity loan in the meantime, your rates will be higher. Wait until you have paid back at least 30 percent of the value of your home toward your mortgage to attempt to get a lower rate.
Risks of a Home Equity Loan for First Time Homeowners
When you first buy a home, you will find you are flooded with offers for home equity loans. Lenders like to make these types of loans because they have a very solid source of collateral against your default. The loans may even be distributed with variable rates, meaning a lender can assess higher fees if you do miss a payment. For a lender, this tends to be a good source of profit. For a borrower, it can be a trap that prevents you from fully recognizing the potential value of your home as an asset. A home equity loan takes the equity you have built in a very valuable asset and converts it back into debt. You have less financial security, and you may end up with monthly payments that are as high as your mortgage, leaving you with few options to pay down the debt. Failing to make the payments on a home equity loan can result in a foreclosure even if your mortgage is in good standing.