California Home Equity Loan Rates
Since home equity loans are secured by equity in real estate they are considered a safer investment by financial institutions than unsecured consumer debt. As a result, the rate of interest reflects the value of this collateral on the debt. While the interest rate of a home equity loan is higher than a first mortgage it is considerably less than general consumer debt. Like most other financial instruments, the rate varies based on supply and demand factors and the overall availability of credit in the market. Common standard interest rate levels used to compare debt service are the government’s LIBOR measure and the Prime Rate, which banks offer their best customers. Since home equity loans are consumer level loans, their rates are much higher than these levels, however they do tend to be in line with mortgage interest rates.
Based on the type of financial institution and the borrower’s credit rating, interest rates for these loans can vary by as much as 3-4%. Another factor that determines the interest rate of such loans is the loan to equity ratio. When 100% of the equity is used as collateral it is considered more risky than when a smaller portion is used as collateral. The reason for this is that banks consider their risks, should foreclosure be necessary: if the loan is 100% of value they have to bear the burden of disposing of the asset. State legislators and regulators are looking at methods to ensure appropriate disclosure of fees charged along with these financial instruments.
Depending on the debt to equity ratio, the origination fees of these loans can run in thousands of dollars. As a result, the state has required lenders to include such origination fees in standard disclosure documents and to calculate an effective rate of interest that includes these costs. This is in an effort to make interest rates that are published easier for the consumer to compare. Professionals in the business possess good insights and advice for loan consumers about the best deal available.
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