How Lenders Determine Your Rate

Rates may differ among lenders and can change depending on several factors, namely your LTV position, credit score and debt ratio:

Your LTV Position

LTV stands for: Loan-to-Value

Banks and other lenders will extend you credit based upon a percentage of the estimated market value of your home.

That percentage of market value minus the amount you owe on your first mortgage (plus any 2nd or 3rd mortgages that you may have) becomes the maximum amount of credit that lenders will give you.

For example:

Let's say that your home has an estimated market value of $150,000. The amount that you still owe on your first mortgage and any other liens is $100,000. The maximum amount you can borrow is calculated as follows:

Banks and other lenders generally charge a higher rate of interest for higher percentages of LTV. That is why you will find in the market quoted rates of PRIME + 0% for LTV percentages of 80% or lower.

To get the best rate, keep your loan request at 80%LTV or lower.

Calculate your own LTV borrowing amount

The Amount You Intend to Borrow

Many lenders use "Tiered Pricing" for their home equity lines and loans. This means they will offer different rates at different levels of borrowing.

The more you borrow, the lower the rate.

The terms often used when quoting rates are points and basis points. A "point" equals 1%. Basis points equals 1/100 of 1%.

For example, if you hear something like:

"... if you borrow 80% of your total approved balance, we will reduce your rate by 25 basis points".

25 basis points equals one-quarter of a point (25/100). They will reduce your rate by one-quarter of a point if you borrow 80% or more of your approved balance.

If you intend to borrow a large percentage of your approved amount, negotiate with your lenders for a reduction in your overall rate.

Your Credit History Report

Lending institutions review the following information from your credit history report to determine your creditworthiness:

your current outstanding debt

places and the number of times you have applied for credit

the kind of credit you have taken out in the past

late payments

over extension of your credit lines

liens - garnishments - bankruptcy

The report lists any payment delinquencies that you may have had over the past three years. You need a credit history of at least one year to ensure a good credit report. The report can be a factor in a lending institution's decision to approve or decline your home equity application.

A credit score determines the rate the lender may charge you. The higher your credit score, the lower your home equity rate.

You should review your credit report for any errors before applying for loan: check your credit report

Your Local Market

Rates can vary by region, due to competition and money supply/demand.

If lending institutions in one region find a very competitive market for home equity products, they may offer lower rates than published national rates.

Likewise, if lenders in certain markets have a tight supply of money, their rates may be higher than published rates.

Most lenders charge the same rate across all their channels. Rates posted on a bank's web site is generally the rate you will find if you walk into a branch or telephone a call center, but not always.

Lenders will negotiate rates if you meet their criteria for borrowing.

They know that consumers have access to rate information from lending institutions from across the country.

So be prepared to shop and negotiate your rate down.

Other Rate-Determining Factors

Your loan-to-debt ratio can impact your rate. Lenders may give you a lower rate if your debt ratio is below 30%. Understand that rate is a reflection of risk. If your debt ratio is low, the risk to the bank is low, thus the lower rate: see our discussion on debt ratios

Other rate-determining factors are market conditions and competition. If lenders need to build their portfolio of loans, or if they need to move into a new market, they may offer really attractive rates to build their loan portfolio.