We are researching home equity loan options and would like your opinion as to an acceptable interest rate. Obviously, the lower the interest rate, the better. The last rate we received (our credit scores are 735 and 850) was 6.5 percent through Bank of America. I think we can do better. Do you have any suggestions?
There are a number of different pricing mechanisms in the marketplace right now, and without knowing more about your specific personal finance situation, it’s difficult to give advice.
But let’s talk a little more generally, and let’s start with your credit scores. First, it’s difficult to believe that you or your husband has a perfect 850 credit score. We don’t know anyone who has a perfect credit score, though supposedly it’s possible. The highest FICO credit score we’ve ever seen is 840, which is pretty darned close.
Even assuming that one of you has an 850 credit score, it doesn’t make up for the fact that the 735 credit score isn’t in the top tier. Top-tier credit scores these days are either above 740 or 780, depending on which lender you’re talking to. Looking at a site like BankRate.com, which lists home equity loans and lines of credit offerings from hundreds of banks around the country, it’s easy to see that for some programs, having a FICO score above 700 will get you the best rate, but for others you’ll take a hit on the interest rate unless you’re above a 740.
It’s possible that your credit scores are Vantage scores, which use a different scoring model than FICO, or some sort of score that’s been offered by a credit reporting agency or some other sort of company. You need to know precisely which score you’ve used to understand how it will factor into the home equity quotes you’ve received.
Another key factor is how much equity you have in your home. Many lenders will only do a home equity line of credit or home equity loan up to 80 percent of the equity in the property. So, if your primary loan is a 90 percent mortgage, you won’t even qualify, unless it’s at a higher interest rate.
Typically, lenders will want to see you with a primary loan of around 70 percent or less, and then you can get another 10 percent home equity loan or line of credit.
Finally, you won’t get the same low interest rate on a home equity loan or line of credit as you will on a primary mortgage. You’ll pay something higher than that, which is why the rate you were quoted sounds high but may not be that far off the mark. These types of loans are typically based on the prime interest rate plus or minus a certain “margin.” If you start shopping around, you’ll see that in some cases, the lender’s margin is 1.5 percent, or higher.
To recap, you won’t know exactly what kind of interest rate you can get until you know how much equity you have in your home and you fully understand your credit scores. That’s the best place to start. Then, shop around with a variety of lenders until you find the best deal.
Ilyce R. Glink’s latest book is “Buy, Close, Move In!” If you have questions, you can call her radio show toll-free (800-972-8255) any Sunday, from 11 a.m. to 1 p.m. EST. Contact Ilyce through her Web site, www.thinkglink.com.