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If you’re thinking about tapping into your home equity to cover the cost of a project, consolidate debt, or finance an unexpected cost, a home equity line of credit, or HELOC, is a popular way to do it.
You’ll only have to pay off what you spend on your HELOC, similar to a credit card, but make sure you know all of the pros and cons before jumping in. If you decide a HELOC is the way to go, then your next step is to lock in the best HELOC rate possible. There are several strategies you can use to make sure you’re getting the best deal.
What is a HELOC?
A home equity line of credit (HELOC), is a revolving credit line secured by your home. It’s similar to a credit card: You’ll be able to spend money using your line of credit however you want, and then have a set amount of time to pay off whatever you spent. HELOCs traditionally work on a 30-year model, with a 10-year draw period (where you spend), and a 20-year repayment period (where you pay off what you spent).
How HELOC rates are set
Like mortgage rates and even high-yield savings account rates, HELOC rates fluctuate with the prime rate, which is set by individual banks and aggregated by the Federal Reserve for a daily rate report. Lenders have their own set of standards that help determine how much more than the prime rate they want their rates to be. Some lenders may assign a larger margin (meaning higher rates for you), while others choose a smaller margin (lower rates for you).
It’s important to remember that HELOC rates are variable, so even if you open your HELOC at a certain interest rate, the interest you actually owe will vary over time. If rates go up, you will owe more interest on your HELOC.
What is a good HELOC interest rate
This will depend on the amount of equity in your home, your creditworthiness, and what housing market you’re in. But generally, the most attractive rate you can get is going to be toward the lower end of what lenders are currently offering. Today, that’s around 3.5%.
HELOC vs. home equity loan rates
Home equity loan rates also fluctuate with the prime rate, but home equity loans have fixed interest. That means whatever rate you lock in when you get your home equity loan is the rate you will pay for the entirety of your loan term.
Home equity loan rates are generally a bit higher than those for HELOCs. Right now the low-end of what most lenders offer is around 3.75%-4.00%
6 Ways to Get the Best HELOC Rate
1. Look outside of the box for lenders
A good place to start your search is at a bank where you already have an existing, good relationship with. But don’t stop there. Compare rates at local credit unions (which can often offer some of the best rates), online lenders, and other national banks.
Many rates are location-dependent, and you may need to enter some personal information about your home and personal circumstances before getting an estimate. Also, any estimate you do get can change after a formal credit check and other processes are done that determine your loan eligibility.
Local credit unions often offer competitive rates on HELOCs.
2. How much equity do you have?
The more equity you have, the better. The amount of equity you have in your home helps determine what rate you can get for a HELOC, and how much your credit line will be.
The pandemic has caused requirements to be even stricter. “Borrowers are going to need more equity that they wouldn’t have needed prior to the pandemic. And the reason for that is to mitigate risk from the lender’s perspective,” says Greg McBride, chief financial analyst at Bankrate. “If the borrower’s retaining more of an equity stake, then that cushions any loss that the lender may face in the event of default.”
The more equity you have in your home, the lower your combined loan-to-value ratio (LTV) will be. The loan-to-value ratio is used to measure the relationship between a loan amount and the market value of your home — the lower it is, the better.
3. Consider your credit
There are several factors that go into determining what HELOC rate you qualify for. One of the biggest ones, apart from how much equity you have, is your credit score and history. Lenders want to see your positive payment history on past loans and debts.
4. Think about a shorter time frame
Most HELOCs work on a standard 30-year model, with a 10-year draw period during which you can use your HELOC up to the amount of your line, and then a 20-year repayment period where you repay everything you spent (plus interest).
But if your lender allows it, a shorter draw or repayment period may result in a lower interest rate. But remember, that means you’ll have a shorter amount of time to take advantage of the HELOC and/or to pay off your debt.
5. Look for discounts
Many lenders offer a discounted introductory rate on a HELOC, but remember that a HELOC is a long-term commitment (usually 30 years). A six-month discount on your rate won’t make that much of an impact if you use your HELOC for the whole draw period, so make sure you know what rate you’ll get after the introductory period ends and if you can afford it.
6. Lock in a fixed-rate HELOC
HELOCs are traditionally variable-rate products, but it is possible to lock in a fixed-rate HELOC on a remaining balance. In a scenario where interest rates are rising, a fixed-rate HELOC can save you from paying more as rates rise.
There’s often a fee to lock in that interest rate, so make sure you take that into consideration before signing the dotted line. But if rates are really spiking, a fixed-rate lock can save you money over the long run.
There’s a few ways that you can boost your odds of getting a good HELOC interest rate, but the most important things are going to be the amount of equity you have in your home, and your credit history.
And remember, most HELOCs have variable rates, so whatever rate you get is subject to fluctuate based on the market.