First-Time Homeowners: Home Equity Loan Interest Rates to Expect

If you are a homeowner and this is your first home, then you might be put into a different category for qualifying for home equity loan interest rates than someone who has owned a home before. First-time homebuyers often have not had time to establish a long credit history, plus their debt to income levels are high because of just having bought a home. Therefore, many are likely to be offered higher interest rates for any type of loan.

Loans are Based on Credit Reports

When anyone tries to get a home equity loan, the home equity interest rates and the amount they can borrow is based on the market value of the home minus the amount of money the owed on the mortgage, plus the allowance the lender agrees on. For example, if a house cost $100,000, and $50,000 is paid off, then you have $50,000 in equity if the home is still worth $100,000 on the open market. The bank may allow up to an amount of 70 to 80% of the equity. If as a first-time buyer, you have a very good credit score and an established credit history, you may get a good home equity interest rate.

Debts Affect Loans

However, since you have just bought a home, your income to debt ratio may be very high. Also, it isn’t likely you have much equity in your home if you haven’t owned it for very long. These two things are big factors in whether or not you can get a home equity interest rate at all, even if they are offered at high rates. It is very possible that no lender will give a first-time buyer any additional loans. You may be viewed as too much of a risk. Most lenders feel that before any homeowner considers a home equity loan, they should have paid off at least a third of their original mortgage amount.

Special Risks for New Buyers

Sometimes when you first buy a house, you may get a lot of offers in the mail for something like a home equity loan at a low rate. These types of lenders know that you may default on the loan and then they will own the house.

This is a home equity interest rates trap that you must be careful not to fall into. You may end up in a spiral of debt that you are not likely to be able to get out of and risk loosing your home. Lenders make money off the high interest and fees, and they can take the home if you default. These type of unscrupulous lenders know that you may be too inexperienced using credit wisely to understand how to deal with these situations.

Conclusion

A person’s home is a big investment, that in time can be a source of additional income that can get the homeowner lower home equity interest rates. If they wait until they have paid off at least a third of their current mortgage they will have better changes of obtaining a good loan rate. It’s best to wait until the market value on the home is high and you owe considerably less on your mortgage. These are the things that home equity interest rates are based on.