Determining Home Equity Rates
Do you know what influences home loan rates?
If you're interested in making home improvements, such as remodeling your kitchen or building an additional room, you may choose to borrow against your home's equity. However, before you do, take the time to understand how home equity loans work. Some borrowers may not realize that more than just their credit score is taken into consideration when it comes to determining loan rates. The following are other ways in which home equity rates are influenced.
Prime lending rate
The Wall Street Journal's prime rate is the main benchmark, or index, used in determining home equity rates. Published daily, the prime lending rate is based upon the Federal Funds Target Rate, which is adjusted by the U.S. Federal Reserve throughout the year depending on current market conditions. The purpose of this is to control certain economic conditions, such as inflation or recession.
To calculate the prime rate, add three percent to the Target Rate. For example, if the Target Rate is 0.25 percent, the prime rate will be 3.25 percent. This number, however, is not typically the final home loan rate you'll receive from your lender. Financial institutions often add or subtract an additional interest rate, or margin, from the prime lending rate based on factors like your credit score, the amount you are borrowing and your loan-to-value ratio.
In addition to the Prime rate, some loans may be based on the London Inter-bank Offered Rate (LIBOR). The British Bankers Association uses information gathered from a survey of multiple lending institutions to determine LIBOR rates. As with home equity loans and home equity lines of credit, a margin is added to or subtracted from the index by your financial institution to determine your final rate.
Securities and home loan rates
Some home loan rates also may be tied to securities under the Home Ownership and Equity Protection Act (HOEPA). Instituted in 1994, HOEPA protects homeowners against deceiving lending practices. The act states that interest rates on first mortgages must be at least eight percentage points higher than U.S. Treasury Department securities of comparable maturity. Second-lien loans must be at least 10 percentage points higher.
Get a competitive home equity rate with Citizens Bank to cover home improvements
When you're ready to start your home remodeling project, speak with a Citizens Bank Home Loan Originator to discuss your home loan options, or start the application process for a home equity loan or line of credit today.