How to Get the Best Home Equity Loan for Your Credit and Qualifications

Equity is a percentage of your home's value over the current mortgage amount.

A home equity loan is based on the amount of equity available in your home--what you have paid against the home's value. Your equity percentage, which is computed by subtracting your unpaid mortgage balance from your home's fair market value, rises as you pay your mortgage down and/or your home increases in value. Many homeowners use a home equity loan to pay off high-interest debts, since the interest is generally tax-deductible and interest rates are usually ower because, with the home as collateral, there is less risk to the lender. Qualifying for a home equity loan includes having a strong credit history, making mortgage payments on time and proving stability with employment history, and the better you score in these areas, the more favorable your loan rate.

Difficulty:

Moderate

Instructions

1. Find your free credit bureau report at annualcreditreport.com. Use the site to choose your state from the menu, and then enter your personal information. Print your credit report to view entries that have been made from your creditors. Make sure there are no discrepancies or mistakes on your credit report. If you find an error, contact the reporting agency to complete a claim form.

2. Gather documents you will need to apply for a home equity loan. These include such items as a payroll stub, an income statement, employment verification and tax documents. The documents required must be up to date.

3. Contact the lender carrying the mortgage on your home to request a home equity loan. The mortgage company already has an appraisal on your home, which will save you money on closing costs. Also, if you make mortgage payments on time, the mortgage company may offer you a better rate on your home equity loan to keep your business.

4. Visit a local mortgage broker to receive quotes for a home equity loan. Mortgage brokers contact several lenders who offer rates to compete for your loan. This helps you get a low interest rate for a home equity loan.

5. Go to a local bank and request information about a home equity loan. Local banks can offer you a loan even if your credit score is weak and you have difficulty qualifying with other lenders.

6. Search online at Bankrate.com for the home equity loan rates in your area. Review the rates by entering your credit rating and location. Contact a lender that provides a low rate for your credit qualification.

Tips & Warnings

• Make mortgage payments on time for at least six months before attempting to secure a home equity loan.

References

• The Federal Reserve Board; What You Should Know About Home Equity Lines of Credit
• Annual Credit Report: Free Credit Report
• Bankrate: Home Equity Loan Rate
• Home Lending Info.: Interest Rates and Other Charges