What Factors Contribute to Home Equity Loan Interest Rate Changes?

Home equity loan interest rates are typically offered in variable terms. This means the rate will fluctuate during the life of your loan. Some borrowers will see little to no fluctuation, while others will find their rates skyrocket to a level that makes it impractical to continue using the loan. Your personal actions and some items outside of your control will determine the rate changes you experience.

Rate Changes on Revolving Debt

Revolving debt is different from installment debt. Some home equity loans are issued in one lump sum. This sum is then paid back through regular monthly installments. With revolving debt, you are issued a limit instead of a lump sum. You can continue spending up to this limit, and then you need to pay down some of the balance if you wish to continue spending. If you do not pay down your balance, the interest will compound, making the loan more expensive. When you spend and when you pay down the balance is up to you. Because of the flexibility offered on this type of debt, the lender typically retains the right to change your rates if you fail to pay your balance off regularly or miss minimum monthly payments.

Personal Factors Contributing to Changes

You can keep your rate low by making sure you never miss a minimum monthly payment. This is the most important aspect of the debt. You can reduce financing fees by paying down your balance whenever possible, and it is best to do this on a monthly basis. The way you handle debts on other accounts will also have an impact on your home equity loan interest rate. For example, missing a mortgage payment can drop your credit score and raise red flags for other lenders.

Market Factors Contributing to Changes

The credit market will have an impact on your loan rates even if you are a responsible borrower. For example, in a weak economy, many borrowers may be defaulting on their debts or missing payments. Lenders need to compensate for these high losses. They will do so by enacting higher rates across the board, not just on those borrowers who default. You may see your rates go up in response to a weak economy as a result. If the Federal Reserve raises the national prime rate, which is usually in response to a strengthening economy, you can also see your rates go up.

Legal Considerations on Interest Rate Changes

Interest rate changes are not always fair, and sometimes they are not even legal. As of 2007, credit companies can no longer raise rates on existing balances. If a company does intend to raise the rates on your new charges, you have a legal right to receive notification in writing of the intended change and contest the change. Knowing your rights is important because it will protect you from predatory lending. A home equity lender cannot issue you a low rate loan then raise the rates rapidly without notification which used to be a common practice in predatory lending.