PHNjcmlwdCB0eXBlPSJ0ZXh0L2phdmFzY3JpcHQiIHNyYz0iaHR0cHM6Ly9zdGF0aWMubXlmaW5hbmNlLmNvbS93aWRnZXQvbXlGaW5hbmNlX3ZpZXdwb3J0X2RldGVjdGlvbi5qcyIgLz48c2NyaXB0IGFzeW5jIHR5cGU9InRleHQvamF2YXNjcmlwdCI+bXlmaVdhdGNoV2lkZ2V0KCdteWZpV2lkZ2V0XzAnKTs8L3NjcmlwdD4=Lindsay Frankel is a Denver-based freelance writer specializing in personal finance and real estate content. Her work has been featured in publications such as Investopedia, NextAdvisor, BiggerPockets, Bankrate, and LendingTree. She graduated magna cum laude with a bachelor's degree in education from Elmhurst University. When she's not writing, you can find her playing music or exploring the outdoors with her rescue dog, Lucy. You can reach Lindsay at https://www.lindsayfrankel.com/.Hearst Television participates in various affiliate marketing programs, which means we may get paid commissions on editorially chosen products purchased through our links to retailer sites. This may influence which products we write about and where those products appear on the site, but it does not affect our recommendations or advice, which are grounded in research.Mobile app users, click here for the best viewing experience.The rock-bottom mortgage rates homebuyers got during the peak of the pandemic seem like nothing but a daydream for anyone who’s house shopping these days. Meanwhile, homeowners have record levels of home equity to tap: The average borrower can dip into $280,000 worth of equity, according to real estate data firm CoreLogic. The combination of sky-high equity and rising mortgage rates has triggered a tidal wave of home remodeling projects, as people look to make their current home more comfortable or boost its value for when they’re finally ready to sell. Homeowners can tap into that equity through either a home equity loan or a home equity line of credit (HELOC). But the interest rate on a home equity loan significantly affects how much it costs to pay back. An increase of just one percentage point can result in hundreds or thousands of dollars more in interest over the life of a home equity loan. While market conditions impacting home equity loan rates are outside of your control, you can be proactive about improving your credit and, when it comes time to apply, shop around for the best rate. Here’s what it takes to get the best rate on a home equity loan, so you can apply with confidence. What is a home equity loan?Home equity can be an excellent financial resource for homeowners, especially with home prices so high in many markets. A home equity loan, sometimes called a second mortgage, is one way to borrow against the equity in your home. When you take out a home equity loan, the loan is secured by your property. That means if you fail to repay a home equity loan, the lender could foreclose on your home. That’s the scary news. The good news is that payments for home equity loans are fixed, so you can predict how much you’ll owe every month for the life of the loan.Current home equity loan ratesHow does a home equity loan work?Lenders will typically let you borrow up to 80% or 85% of your home equity, which is your home’s fair market value less your outstanding mortgage balance. Here’s what this could look like. Say your home is worth $200,000, but you still owe $100,000 on your mortgage. If you borrow 80% of your existing equity, you’ll end up with $80,000 to work with.You’ll receive the cash in a lump sum, minus closing costs, and repay the loan in fixed monthly installments. Home equity loans come with terms ranging from five to 30 years. A longer term results in lower monthly payments, but you’ll pay more in interest over time. How mortgage rates affect home equity loan ratesMortgage rates and home equity loan rates are both based on the prime rate, which is the rate individual financial institutions use for their customers. Banks and credit unions typically set this reference rate about three percentage points higher than the federal funds rate, which is the overnight cost commercial banks pay to borrow from one another. The Federal Open Market Committee sets the federal funds rate with the goal of keeping prices stable while encouraging maximum employment. During a sluggish economy, the Fed typically keeps the federal funds rate low to jumpstart the economy. But when inflation is running high, the Fed goes in the other direction, raising the federal funds rate to discourage borrowing and slow down the economy. When the Fed increases the federal funds rate, financial institutions pass on the higher borrowing costs to their customers in the form of higher rates on credit products, such as mortgages and home equity loans. Since home equity loans have fixed interest rates, the current prime rate has a long-term impact on borrowers’ monthly payments. Home equity loan vs. HELOCA HELOC is a revolving line of credit that you can borrow from as you go, much like a credit card. Like a home equity loan, it’s secured by your property, and the requirements to get one are similar. However, there are several key differences between a home equity line of credit and a HELOC.HELOCTypically comes with lower interest rates upfrontInterest rates may be fixed, but are typically variableMay come with fewer closing costsDraw period typically lasts 10 years, during which you only need to make interest payments. Therefore, HELOCs come with lower monthly payments during this initial period. During the subsequent repayment period, you’ll begin making full payments of principal and interest. Can borrow HELOC as-needed and only pay back what you borrow, which can be helpful if you aren’t sure how much you’ll needAvailable credit replenishes as you make payments Home equity loanTypically comes with higher interest rates, but they won’t change during the term of the loanMay come with higher closing costsRepayment period typically lasts five to 10 yearsA fixed amount of money, so you must know how much you want to borrowCurrent HELOC ratesTips for getting the best rate on a home equity loan or HELOCWhether you opt for a home equity loan or a HELOC, there are a few ways you can save money on interest. Improve your credit: Before you apply for a home equity loan, resolve any errors in your credit report, get current on your payments, and pay down as much debt as possible. Aim for a loan-to-value ratio of 80% or less: Though some lenders will let you borrow more, you’ll get the best home equity loan rates with a loan-to-value ratio of 80% or less. Calculate your home equity and apply for no more than 80% of that amount. Compare rates: Some lenders will be able to offer lower rates for your individual financial profile than others. Be sure to compare the APR, which represents the total cost of borrowing, across a handful of lenders before formally applying. Take advantage of discounts: Your bank or credit union may offer a rate discount for members, so start looking there. But also pay attention to special promotions offered by online lenders, including rate discounts for automatic payments. Requirements for getting a home equity loanThere are a few basic requirements to qualify for a home equity loan. You’ll need:Sufficient equity: You’ll need at least 15% to 20% equity in your home to qualify for a home equity loan with most lenders, which means you can’t owe more than 85% of the fair value market of your home on your mortgage. Sufficient income: Lenders will check to make sure you have enough income for repayment on the amount you apply for. You’ll likely need to provide W-2s or pay stubs during the application process. A fair or good credit score: At a minimum, you’ll need a FICO score of 620 or higher to qualify for a home equity loan with most lenders, and some will require higher credit scores. The lender will also take a close look at your payment history. Though you can qualify for a home equity loan with fair credit, you’ll need excellent credit to get the lowest interest rates. A debt-to-income ratio of 50% or less: The lender will evaluate the percentage of your monthly income that you put toward debt repayment to make sure you’re not overextended. This is known as your debt-to-income ratio, and it must be no greater than 50%. In fact, most lenders require a DTI of 43% or less, while some only accept applicants with a DTI of 36% or less. Alternatives to home equity loansA HELOC is one alternative to a home equity loan. There are also a couple of other ways to use the equity in your home to get cash:Cash-out refinance: Replaces your current mortgage with a larger mortgage, allowing you to keep the difference as cash. (This might not be the best option at the moment because you’d probably end up with a higher mortgage rate than you have now.)Shared appreciation mortgage: Instead of getting a loan, you can cash out some of your home equity by giving partial ownership to an investor or shared mortgage appreciation companyAdditionally, there are several ways you can get cash without using your home as collateral. These include:Personal loans: These installment loans may come with lower limits and higher interest rates than home equity loans, but they’re quick and don’t come with closing costsCredit cards: A credit card gives you access to revolving credit at higher rates than a HELOC, but you can take advantage of a 0% introductory APR offer on a new credit card to fund smaller expenses, such as buying new appliancesDepending on your needs, you may have access to other forms of financing as well. For example, you could take out Direct Parent PLUS loans to fund your child’s education, or use contractor financing to fund your renovation. Choose the option that makes the most sense for you and your family based on your financial situation. Once you’ve repaid your loan, you can start saving the money you budgeted for repayment — remember, diligent saving means you can avoid borrowing costs altogether down the road. Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as Financial and Home Services Editor for the Hearst E-Commerce team. Email her at lauren.williamson@hearst.com.