Rates may differ among lenders and can change depending on several factors, namely:

Your LTV Position

LTV stands for: Loan-to-Value

Banks and other lenders will extend you credit based upon a percentage of the estimated market value of your home.

That percentage of market value minus the amount you owe on your first mortgage (plus any 2nd or 3rd mortgages that you may have) becomes the maximum amount of credit that lenders will give you.

For example:

Let's say that your home has an estimated market value of $150,000. The amount that you still owe on your first mortgage and any other liens is $100,000. The maximum amount you can borrow is calculated as follows:

Banks and other lenders generally charge a higher rate of interest for higher percentages of LTV. That is why you will find in the market quoted rates of PRIME + 0% for LTV percentages of 80% or lower.

To get the best rate, keep your loan request at 80%LTV or lower.

Calculate your own LTV borrowing amount.

The Amount You Intend to Borrow

Many lenders use "Tiered Pricing" for their home equity lines and loans. This means they will offer different rates at different levels of borrowing.

The more you borrow, the lower the rate.

The terms often used when quoting rates are points and basis points. A "point" equals 1%. Basis points equals 1/100 of 1%.

For example, if you hear something like:

"... if you borrow 80% of your total approved balance, we will reduce your rate by 25 basis points".

25 basis points equals one-quarter of a point (25/100). They will reduce your rate by one-quarter of a point if you borrow 80% or more of your approved balance.

If you intend to borrow a large percentage of your approved amount, negotiate with your lenders for a reduction in your overall rate.

Your Credit History Report

Lending institutions review the following information from your credit history report to determine your creditworthiness:

• your current outstanding debt
• places and the number of times you have applied for credit
• the kind of credit you have taken out in the past
• late payments
• over extension of your credit lines
• liens
• garnishments
• bankruptcy

The report lists any payment delinquencies that you may have had over the past three years. You need a credit history of at least one year to ensure a good credit report. The report can be a factor in a lending institution's decision to approve or decline your home equity application.

A credit score determines the rate the lender may charge you. The higher your credit score, the lower your home equity rate.

You should review your credit report for any errors before applying for loan. Link to our parent site www.SayPlanning.com for the following credit report information:

• applying for credit
• building, sustaining a strong credit report
• repairing your credit report
  
  
• viewing and monitoring your credit report
• protecting yourself from identity theft

Your Local Market

Rates can vary by region, due to competition and money supply/demand.

If lending institutions in one region find a very competitive market for home equity products, they may offer lower rates than published national rates.

Likewise, if lenders in certain markets have a tight supply of money, their rates may be higher than published rates.

Most lenders charge the same rate across all their channels. Rates posted on a bank's web site is generally the rate you will find if you walk into a branch or telephone a call center, but not always.

Lenders will negotiate rates if you meet their criteria for borrowing.

They know that consumers have access to rate information from lending institutions from across the country.

So be prepared to shop and negotiate your rate down.

Other Rate-Determining Factors

Other rate-determining factors are market conditions and competition. If lenders need to build their portfolio of loans, or if they need to move into a new market, they may offer really attractive rates to build their loan portfolio.

Many lenders offer "teaser or introductory rates". These are lower-than normal rates for a period of time to "entice" consumers to close their loan application with them. But after a certain length of time, usually from 6-12 months, the "introductory rate" reverses back to the normal rate.

Most lenders use the PRIME RATE as a index when calculating home equity line of credit rates.

They will then add a margin to the index to come up with the rate that they will charge for your home equity product.

For example:

PRIME + 0.00%

This quoted rate means that the lender will charge you the index (PRIME RATE) plus a margin of 0.00%.

Your interest rate will then be: The PRIME RATE

 

If you see this rate quote:

PRIME + 1.5%

The lender will charge you the index (PRIME RATE) plus a margin of 1.50%.

Your interest rate will then be: PRIME RATE + 1.50%

 

If you see the rate quote:

PRIME - 0.5%

The lender will charge you the index (PRIME RATE) minus a margin of 0.50%.

Your interest rate will then be: PRIME RATE - 0.50%

 

Since rates for home equity lines fluctuate — meaning that whenever the PRIME RATE increases or decreases — your interest rate will likewise go up or down along with the PRIME RATE.

For example, if the PRIME RATE increases one-quarter point, each of the interest rates quoted above will increase by exactly one-quarter point.

Likewise, if the PRIME RATE decreases by one-quarter point, your new interest rate will decrease by the same amount.

Rates can vary by institution. Some lenders charge a low rate but may impose annual fees and other usage fees. It is important that you "read the fine print" before selecting a home equity product based on rate only.

Some lender charge tiered rates, which means the more you borrow that lower your rate.

If you come across lenders who use a different index other than PRIME RATE, request to see a historical trend of their rate increases and decreases. Compare this to the historical trends of the PRIME RATE.

Banks use several factors to calculate the fixed rate on home equity loans. Two key factors include:

1. the lender's cost of funds
2. the lender's cost of capital

Allow us to use this simple illustration

Banks collect and manage money deposits like checking and savings. There is a cost associated with collecting and safeguarding deposits, which include the interest rate consumers collect on their accounts, interest rates from the fed and other banks for borrowed reserves, safekeeping, and other insurance and maintenance fees.

Banks don't let these deposits sit idle.

They take these deposits and lend it out in loans and other advances. When banks turn that money into loans, there is a "cost of funds" associated with the use of that money.

Banks are in the business of making money.

So they will take the "cost of funds" and other related maintenance and servicing expenses and add a margin as profit. This adds up to the interest rates they are charging for fixed-rate home equity loans.

Of course, there are more sophisticated models that go into the loan rate that include the "cost of capital". But that is beyond our scope.

Just note that when the "cost of funds" go down, lenders pass on the decrease in lower home equity loan rates.

Likewise, when the "cost of funds" increase, you will find an increase in home equity loan rates.

Home equity loans are generally FIXED rates, meaning the rate and payment will remain the same during of the life the loan.

Fixed rates for home equity loans can vary by your LTV position, the amount you borrow, and your credit history rating.

If you are strong in each of these areas, you can expect an attractive FIXED rate offer from a lender competing for your business.