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Want the best home equity loan? Do these three things

To get the best home equity loan it's important to time your application. Getty Images

In today's economic climate, in which many Americans are still grappling with persistent inflation and higher interest rates meant to combat it, it may seem like all of your funding options are out of reach. Rates on personal loans and credit cards, after all, are often in the double digits. And refinancing may not make sense when rates are as high as they have been. Fortunately, current homeowners have an attractive, low-rate alternative that they can pursue today: their existing home equity.

By using a home equity loan or home equity line of credit (HELOC) homeowners can finance major home repairs or improvements, often at a much lower rate than they would if they pursued an alternative financing option. If they use the money for qualifying home renovations, they could even deduct the interest they pay from their taxes at the end of the year. 

To truly make a home equity loan or a HELOC valuable, however, it's vital to secure the lowest interest rate possible. Fortunately, there are multiple ways to do so. Start by exploring your home equity options here to see what rate you're eligible for.

3 ways to get the best home equity loan

Here are three ways to secure the best home equity loan.

Shop around

There's a popular misconception that homeowners need to use their existing mortgage lender to deduct their home equity. But that's not true. Homeowners can — and should — shop around for a home equity loan lender to improve their chances of securing the lowest rate and best terms. It's possible that your current lender will be your best resource. But it's also possible that you could obtain a better rate with another institution. You won't know for sure until you look around and compare your options.

Just make sure to do an apples-to-apples comparison. So if you're looking for a home equity loan for $30,000 from one lender don't look for a HELOC for a smaller credit line with another. Compare exact loan types, amounts and terms from at least three lenders to establish a clear baseline to review. Then go back to your current lender to see if they can match or beat those numbers.

Start shopping for home equity loans here now to learn more.

Time your application

Home equity is calculated by how much of your mortgage you've paid down and how much your home is worth at the time of application. For example, let's say you've paid your mortgage principal balance down from $500,000 to $400,000. In the interim, your home value has increased to $600,000. In this scenario, you'd have $200,000 worth of home equity. Since most lenders will cap what you can borrow at 80% to 85%, you'd be eligible to withdraw $160,000 to $170,000. 

However, the timing of your application matters. In the above example, you'd only have that $200,000 if you acted when your home had appreciated in value. If it depreciated, as many homes across the country have in recent months, then you would have significantly less equity to utilize. So, if you know you want to use your home equity, and you're living in a part of the country that has seen a spike in home values, now may be the best time to act.

Get started here now.

Improve your credit score

No matter the loan you need, the best rates and terms are reserved for those applicants with the highest credit scores and cleanest credit history. That's especially true for home equity loan applicants. So, if you don't need the money urgently, hold off and work on improving your credit score in the interim. This can include paying off debt in full, making on-time payments and not applying for any other credit that could result in a hard credit check — and reduction in your credit score. 

The bottom line

Home equity loans offer homeowners a smart and cost-effective way to finance major expenses. To get the best and lowest rate loan, however, applicants should first shop around to compare lenders other than their current one. They should also time their application as best they can to take advantage of higher real estate values. And, as is always the case when applying for credit, they should do their best to quickly and effectively boost their credit score.

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