HELOCs Are on Sale, But Read the Fine Print

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(This article was originally published in NextMove, our weekly newsletter on the housing market. Sign up for it using the box below.)

I love a good sale, but you have to read the fine print.

This is Jon Reed with NextAdvisor, and I guess it’s more accurate to say I hate paying full price. Most of the furniture in my house came from a thrift store (or the side of the road, if we’re honest). 

But let’s talk about a different kind of sale, this one related to homeownership: You can sometimes get a home equity line of credit on clearance. Kind of.

This showed up last week when I was writing our weekly story on trends in home equity loan and HELOC rates. I expected the average rate for a HELOC to stay pretty flat – there was no recent Federal Reserve rate hike to push it up. Instead, it dropped. By more than half a percentage point.

That’s because some lenders are putting their HELOCs on sale. More accurately, they’re launching promotional offers with lower introductory rates to get borrowers in the door during a slower season.

Here’s what that looks like: Say the going rate for a HELOC from a lender is somewhere around 8%. That includes a fixed margin for the bank based on how much you borrow, your credit history, the value of your home, etc. It also includes a variable component, usually tied to the prime rate, which will move up and down over the life of the line of credit depending on what the Federal Reserve does. But with a promotional rate, you get six months or a year of a cheaper rate first.

That might mean six months of 0.99% interest. Think of it like the introductory rate on a credit card, where you don’t pay interest for a year and then after that you pay 18%.

An introductory rate can be a great thing – if you prepare for it to end. I recommend adjusting your borrowing so that you know you can make the payments when the introductory rate is over, or have a plan to pay off a lot or all of the balance quickly.

We’ve seen examples of this in real stories of consumers using these intro rates to their advantage. Jason Krueger, a certified financial planner, told us he used a HELOC with an introductory rate of 1% to pay for a car. Importantly, he knew he could pay it off in less than a year.

The risk comes when you don’t have a plan for when the intro rate expires and your monthly payment rises dramatically. You don’t want to be in dire straits and unable to pay back a HELOC because then, you could lose your home.

HELOCs are going on sale, but those cheap rates won’t last forever. Don’t let yourself be surprised when they end.