If you’re thinking about using a second mortgage to access your home’s equity, one of the most important things to understand is how interest rates work and how they affect your monthly payments and overall loan cost.
Second mortgages, which include home equity loans and home equity lines of credit (HELOCs), give you the ability to borrow against the equity in your home without touching your existing first mortgage. But just like any other loan, the interest rate you receive plays a big role in how much you’ll pay over time.
How Are Interest Rates Determined?
Interest rates on second mortgages are influenced by a variety of factors, including:
- Your credit score: Lenders typically offer lower rates to borrowers with strong credit histories.
- Loan-to-value ratio (LTV or CLTV): The more equity you have in your home, the lower your risk as a borrower, which can lead to better rates.
- Loan amount and type: Whether you choose a fixed-rate loan or a variable-rate HELOC can affect your rate. Fixed rates tend to be slightly higher but offer predictable payments, while variable rates may start lower but can fluctuate over time.
- Market conditions: Broader economic trends and interest rate policies set by the Federal Reserve also play a role in what lenders offer.
Why Rates Matter
Even a small change in interest rate can make a noticeable difference in your monthly payment and total loan cost.
For example, a $75,000 home equity loan with a 10-year term at 8% interest would result in a monthly payment of around $910 (depending on variety of other factors, like your credit score). That same loan amount at 10% interest would raise your payment to roughly $990. Over the life of the loan, that adds up to over $9,000 in additional interest.
What You Can Do
To get the best possible rate, it’s important to:
- Know your credit score
- Consider how much equity you plan to borrow
- Compare fixed and variable-rate options
Want to find out what your rate could be today? Start your application below.
Please Note: Spring EQ does not provide tax, legal, investment or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.