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Home equity lines of credit (HELOC) are a way for homeowners to use home equity to help fund things like home renovation projects, debt consolidation, or even paying for a child’s college tuition.
But in a year that’s seen a pandemic and recession, lenders have gotten stingier when it comes to who gets credit and on what terms. Is a HELOC still a good option for homeowners?
Banks and lenders have pulled back their HELOC offerings. And the banks that are still offering home equity lending are more strict about their qualifications and terms.
If your credit is subpar right now, or you don’t own much equity in your home, you may struggle to find a lender for a HELOC at the moment. Some lenders have stopped taking applications altogether, while others may only be working with existing clients.
The Best HELOC Rates for December 2020
Among banks that still have HELOC options available for those who meet the stricter credit requirements, here are the best rates we could find:
|Bank||APR||Loan amount||Draw period||Repayment period|
|Bank of America||1.99%-24%||$25,000-$500,000||10 years||20 years|
|PenFed Credit Union||3.75%-4.75%||$25,000- $500,000||10 years||20 years|
|Citi||4.09%-6.99%||Based on current home value and mortgage||10 years||20 years|
|Connexus Credit Union||4.14%-15.9%||$5,000+||15 years||15 years|
|SunTrust||3.5%-10.16%||$10,000 to $500,000||10 years||20 years|
|BMO Harris Bank||3.5% -18%||$25,000- $150,000||10 years||20 years|
|Fifth Third Bank||3.75% – 6.35%||$10,000 – $500,000||10 years||20 years|
This list does not represent the entire market. To rank the home equity line of credit (HELOC) rates you’re most likely to be considering, we began by analyzing 18 of the most popular HELOC options.
We eliminated any banks that don’t make information on rates and fees easy to find on their websites, or that have stopped offering HELOCs for the time being.
Some lenders also offer fixed-rate HELOCs, special introductory period offers, or other interest-only period payment plans. Since HELOCs are long-term loans, we only looked at currently available variable-rate APR ranges excluding those special factors.
The APRs shown above are accurate as of Dec. 2, 2020. They are the only APRs openly available for the lenders we looked at. The NextAdvisor editorial team updates this information regularly, though it is possible APRs and even the existence of these HELOC offerings have changed since they were last updated.
HELOC Rates Today
It is going to be more difficult to qualify for a HELOC today than it was before the pandemic.
“As the economy rolls over, lenders start to become much more restrictive with credit, particularly those that are most prone to loss,” says Greg McBride, chief financial analyst at Bankrate.
Those that are most prone to loss are lenders of unsecured debt, like credit cards, and those in a second lien position with secured debt. This refers to the position of a lender to get paid if someone defaults on their loans. For a house, the mortgage lender is the first lien holder.
“In other words, they’ve got the primary spot if the borrower defaults. They’re the biggest claim, and they’re first in line. They’re the ones who would typically foreclose to get their money back,” McBride says. “It’s only after they get their money back that any subsequent lien holders would get paid.”
And as the economy remains unsteady, lenders have significantly tightened who they allow to put them in a second lien position.
“Lenders don’t want to have to foreclose in the first place, because it’s expensive and there’s no guarantee they’ll get their money back, but if that does happen you definitely don’t want to be second in line. You want to be first,” McBride says.
But while it is more difficult to qualify right now, it’s important to note that home equity borrowing hasn’t shut off completely. It’s just gotten tighter as lenders try to limit their risk exposure.
How Does a HELOC Work?
A home equity line of credit (HELOC) lets you borrow against the available equity in your home — similar to a credit card. Your home is used as collateral, meaning if you default on your payments the lender can seize your home.
Like a credit card, you’ll be able to access funds from your HELOC as you need them, instead of like a loan where you take out a predetermined lump sum amount at the onset. However, there’s usually a minimum withdrawal amount based on the total amount of your credit line. This means you’ll be required to spend up to a certain amount.
Standard HELOCs work on a 30-year model, with a 10-year draw period and 20-year repayment period, though there are some exceptions. During the draw period, you may take funds from your HELOC up to the amount of your line of credit, and then you have the repayment period to pay it back.
HELOCs traditionally have variable-rate APRs, meaning your interest rate adjusts over time based on the benchmark U.S. prime rate. The prime rate is the base rate on corporate loans posted by at least 70% of the 10 largest U.S. Banks, according to the Wall Street Journal.
Some lenders can offer a fixed-rate, but it’s more common in a rising-rate environment. Offering a fixed-rate on an outstanding balance, for example, can help consumers if there’s risk that rates will rise.
But that’s really “not something to be concerned about now because interest rates are low and not likely to go anywhere for the next couple of years,” McBride says.
What To Use a HELOC For
HELOCs can be useful for large expenses, like home renovations or paying for your child’s college, according to the FTC. They’re particularly good for ongoing expenses, like projects or tuition, since you only have to pay back what you spend.
They can also be used for debt consolidation, though a home equity loan may make more sense in these cases. A lump sum, through a home equity loan, would lend itself to paying off the debt in “one fell swoop,” says McBride.
But be careful, as tapping into your home’s equity can put you at risk for losing your home if you default for any reason.
Pros and Cons of HELOCS
You only have to pay for the amount of money you actually use, plus interest
There are no regulations about what the money can be used for
There are often discounted rate offers for an introductory period
HELOCs can come with a minimum withdrawal amount
There can be limitations to how you access the funds
There is a set withdraw period after which you cannot access any further funds
There can be fees associated with a HELOC: annual fees, application fees, appraisal fees, attorney fees, transaction fees
You can hurt your credit if you do not make payments on time
How to Apply for a HELOC
You can apply for most HELOCs online. After you’ve done your research and selected a lender, go to their website and start an application.
You’ll need to have some personal information ready to enter into your application: name, address, estimated credit score, and how much you want your credit line to be. You can rarely open a line of credit for less than $10,000, and the maximum amount you can get will also depend on your credit score and home equity.
How to Get a Good HELOC Rate
With interest rates at a low right now, HELOC rates are already better than those for other types of loan like credit cards. For those who qualify for better rates closer to 5%, that’s still much better than credit cards, which have an average APR of 16%.
There are several factors that determine what your HELOC rate will be:
- Your credit score and history: Lenders will pull your credit score to determine your creditworthiness, just as they would for any other type of loan or credit card application. Having good credit, or improving your credit before you apply, can increase your chances of a more favorable rate.
- Your home equity: The more you have, the more it will positively affect your combined loan-to-value ratio (CLTV). The CLTV is a metric used to measure the relationship between a loan amount and the market value of your home. The more equity you have, the lower your CLTV will be and the better you’ll look to the lender.
- The lender: Different lenders offer different rates. Make sure to shop around and consider all of the options for HELOC rates, and don’t discount local credit unions or banks.
HELOC vs. Home Equity Loan
HELOCs are different from another common type of home equity financing — home equity loans. The interest rates you’ll get for each are determined by your credit score, home equity, where you live, the value of your property, and other factors.
|HELOC||Home Equity Loan|
|Revolving credit line||Fixed-term loan|
|Variable APR (usually)||Fixed APR|
|Pay only what you spend||Pay full loan amount|
|Home used as collateral||Home used as collateral|
|Set draw period||Funds for as long as they last|
|Ongoing cash||Lump sum at onset of loan|
|Interest can be deducted for home projects||Interest can be deducted for home projects|