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How To Get The Best Margin On Your Home Equity Loans

[May 16, 2010.]

 

An adjustable rate mortgage, such as an home equity loan, has an index and a margin. The index plus the margin is called the fully indexed rate. It is the fully indexed rate that is used each month to calculate the amount of monthly payment due. Typically, home equity loans are indexed to Prime Rate. Prime Rate tracks the main interest rate set by the Federal Reserve plus about 3.0%. Currently the Prime Rate is 3.25%. Depending on the margin you agree to with your home equity lender, your fully indexed rate could be anywhere from 3.0% to 8.0%. Having the lowest margin possible can save you thousands in interest over the life of the loan.

What Decides The Margin On Your Home Equity Loans

An home loan is an investment for the banker. The margin charged above the index represents the amount of money the home equity lender expects to make as a return on the investment . The riskier the investment, the more return the home equity lender will expect. To get the lowest possible margin, your adjustable rate home loan must be very little risk to the lender. Two characteristics of your loan application stand out to the lender.


  • Credit Score

  • Amount Of Equity In The Home


The home equity lender likely uses a grid of credit scores and loan to value ratios (LTV) to decide which margin to charge. High credit scores above 740 and loan to value ratios below 60% could be a negative margin, charging interest below Prime Rate. Low credit scores below 680 and high loan to value ratios above 80% could have a very high margin, charging interest well above the Prime Rate.

3 Tips To Getting A Low Margin On Your Home Equity Loans

Don't go for the maximum amount. If you are shopping for a new home equity loan to make home repairs, pay off high interest debt, or pay for a big purchase, first consider the margin. Try to plan your home repair, debt consolidation, or purchase by the amount of money you can get cheaply.

Check your credit score first. Get a copy of your credit report and make any corrections that you can that might raise your score. Fix any errors, pay off collections, and reduce balances before you apply for a new home equity loan.

Compare lenders. Different lenders expect different returns on their investments. Shop margins. You may also find a lender who is offering a promotion for new business.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.

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