How do lenders set rates for home equity loans?

You’re here because you’re looking for the smartest way to finance your home renovation. And a RenoFi Loan is it. Our homeowners love how it allows them to get everything on their wishlist—which we love too! So now, you want to know what that looks like for your renovation project.

Here’s a little background on the different factors lenders will use to dictate your rate for a RenoFi Loan. There are four main components…

1. Your FICO Score

You’ve heard of a credit score. Your FICO score is just another name for it. And there are tons of sites where you can check your credit score for free. Home renovation loans require a minimum FICO score of 680. Just like your mortgage, the higher your score, the lower your interest rate will be.

Here’s a breakdown of what that looks like:

• Average - 680 - 720
• Good - 720 - 760
• Very Good - 760 - 800
• Awesome - 800+

So if you fall into the average bracket, you can expect a higher monthly rate. (Check out a few quick ways you can raise your credit score.)

2. Your Combined Loan to Value Ratio (CLTV)

If you haven’t already heard, the best part about a RenoFi Loan is that it lets you borrow up to 90% of the after renovation value of your home — not the current value like most construction loans. This enables you to borrow a lot more to tackle everything on your wishlist. CLTV is calculated by simply taking the value of the RenoFi Loan plus your current outstanding mortgage balance and dividing by your after renovation home value. CLTV is just a fancy way of saying how much equity you will have post renovation. The more equity, the lower the rate.

3. Your Actual Loan Amount

Some lenders will charge a slightly higher rate if your loan amount goes beyond certain thresholds. This typically applies only to major renovation projects, so if your loan hits over $250K, you may see an increase. But if you’re teetering on borrowing $90K versus $80K for a smaller project, it won’t affect your rate.

4. Where You Live

Regionality may impact your rate slightly as well. RenoFi partners with lenders all over the United States, all of which will have their own individual interest rate structures depending on their specific market, but these differences are slight.

What’s even better is that no matter who the lender is or where they’re located, home equity loans in general offer the lowest rates a homeowner will find, aside from a first mortgage. We’re talking much better than personal loans and a million times better than credit cards.

In addition to these four main factors, your personal preferences will play a role too. You may know you want the security of a fixed rate; or maybe you’d prefer lower initial payments with an adjustable-rate loan. Perhaps lower interest rate is more important to you than a lower monthly payment, or vice versa.

For example, choosing a 20-year loan versus a 15-year loan option will keep payments lower, but it will also mean you’re paying interest for longer.

Not sure if you could be eligible for a RenoFi Loan? Try the RenoFi Self Pre-Qualification tool to find out.

For more information on how lenders set rates for RenoFi Loans and what to expect for your renovation project, contact our team today!