How Risk Affects your Home Equity Line of Credit Rate

October 27, 2017

When deciding to take out a Home Equity Line of Credit, one of the first things someone will research is the rate they will pay. As they research rates offered by various lenders, they often learn that more and more banks offer what is called risk-based pricing, which then prompts the question, “What exactly is risk-based pricing?”

As the name indicates, it is a form of loan pricing in which the rate charged depends on the credit risk that a lender deems you to be. Banks that use risk-based pricing do so in order to charge an interest rate that aligns with the amount of risk they are taking on. Therefore, riskier borrowers are charged a higher rate than those that pose less risk.

This allows higher-risk borrowers to still obtain credit rather than being turned down altogether as they could be by a bank that does not use risk-based pricing. It also rewards borrowers with good credit, by lowering the pricing that they will receive on their loan.

We use this form of pricing at Ephrata National Bank and primarily look at three different variables when determining risk:

– The borrower’s credit score
– The amount they are looking to borrow
– How much they are borrowing relative to their home’s value (Loan to Value or LTV)

It’s a lot to think about, which is why we’re always happy to discuss this with customers in more detail. If you have questions, visit our HomeLine page, stop by any of our branch offices or give us a call at (717) 733-4181.

Our blog Why are FICO Credit Scores Important is also a great resource on how to maintain a healthy credit score.