How to Qualify for Good Home Equity Line of Credit Rates
Your home equity line of credit rate will likely be higher than your mortgage interest rate. This is common because the home equity line of credit is subordinate to your mortgage. This means the mortgage would be paid back first if you declared bankruptcy and the home was liquidated. Despite the fact rates will be slightly higher on credit lines for this reason, home equity lines are still secured with collateral, meaning you can negotiate for manageable rates and work to keep those rates low.
Applying for a Home Equity Line of Credit
When you apply for a home equity line, the quality of your application will partially determine the rates you are quoted. To improve your application, consider the following factors:
- Credit score - Make sure your credit is above 700 to put you safely in the low risk category. If you have any missed debt payments, wait until they are two years old before seeking a new home equity line of credit.
- Total debt - If you have a high amount of debt compared to your income, new lenders will be worried you are overspending. Since you are a homeowner with a mortgage, you may have a high amount of debt in your name. Wait until you have paid off enough debt to take on an additional loan without becoming overburdened with payments.
Choosing a Line of Credit Over a Loan
A home equity line of credit is more flexible than a home equity loan. Like a credit card, the line of credit is revolving. You can elect how much to use each month and how much to pay off each month. As long as you are under your limit and making regular payments, you can continue spending. You will pay for this flexibility with a slightly higher interest rate, and the rate will typically be variable. Compare the expense of a line of credit to a traditional loan in order to understand how much the flexibility will cost you.
Negotiating for Lower Rates
Once you know how much you are paying for the additional flexibility, negotiate your rate with the lender. You can compromise flexibility by agreeing to pay a higher monthly minimum payment or setting more rigid spending guidelines. You may also set limits on how high your rates can adjust in order to set your expense lower than it would be if the rate was not controlled at all.
Keeping Rates Low
Once you have rates you are comfortable, you must work to keep them low. There are two key ways to do this. First, it is essential to make minimum monthly payments on time. Then, it is important to keep paying down your balance. If you allow your balance to revolve from month-to-month, your interest will compound more frequently. Your rates may also creep up if you maintain a balance higher than 10 percent of your total limits. Keeping your limit low is the key to maintaining flexibility and monitoring the loan to reduce the total cost.