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How Are Home Equity Loan Rates Calculated?

There are several factors that determine your home equity loan rate and we have highlighted them below. The information presented is for educational purposes only and should be used as a guideline as each lender has their own method of determining rates. Our hope is that you will use this page to make better informed inquiries to obtain the best home equity loan rate. The key variables for determining a home equity loan rate are listed below:

• Your Credit Score - (sometimes known as FICO score)    The better your score, the lower your rate
  
  
• The Loan to Value ratio (the lower the LTV, the lower the rate- LTVs over 100% will result in higher rates)
  
  
• The Cost Of Funds (Derived from LIBOR or Prime Rate)
  
  
• The Size of The Loan (the larger the balance, the lower the rate)
  
  
• The Amount of Fees You Pay Upfront (the more fees you pay upfront, the less rate you pay)
  
  
• Type of Loan and Channel Originated (in general the more human contact, the more rate you pay)
  
  
• The Lender- shop around as each lender prices loans differently based upon the volumes they do
  
  
• Your State- yes, your state has an affect on your rate because of the types of fees each state will or will not allow
  
  The lender will combine all of these variables into the rate that you will pay based upon the anticipated return or profitability thresholds. Believe it or not, federal regulators set minimum proftiability thresholds to ensure banks are financially sound. If we hold all of these variables equal among two lenders, low home equity loan rates can vary by as much as 100 basis points. (1%) Why? Here are several reasons:

1. Because some lenders have automated their origination process and process loans at a lower cost
2. Some lenders have developed low cost sources for leads and they pass those savings on in the form of reduced home equity loan rates
3. Some lenders are willing to trade off profit for volume and/or customer loyalty
4. Some lenders give low rate home equity loans based upon credit score bands and the bands may differ between lenders
5. Some lenders only do large size loans, reducing the average rate per home equity loan

What ever the reasons, it is important that you understand these principles when shopping for the best home equity loan rate.

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