If you’re thinking of tapping into your home equity to cover the cost of a project, consolidate debt, or fund unexpected costs, a home equity line of credit, or HELOC, is a popular way to do it.
All you have to do is pay off what you spend on your HELOC, similar to a credit card, but make sure you understand all the pros and cons before you step is to determine the best possible HELOC rate. There are several strategies that you can use to make sure you are getting the best deal.
What is a HELOC?
A home equity line of credit (HELOC) is a revolving line of credit that is secured by your home. It’s similar to a credit card: you can spend whatever you want with your line of credit, and then have a set amount of time to pay off whatever you’ve spent. HELOCs traditionally operate on a 30 year model with a 10 year draw period (where you spend money) and a 20 year payback period (where you spend what you spent).
This is how HELOC tariffs are set
Like mortgage rates, and even high-yield savings account rates, HELOC rates fluctuate with the base rate, which is set by individual banks and aggregated by the Federal Reserve for a daily interest report. Lenders have their own standards that help determine how much more than the base rate they want. Some lenders may assign a larger margin (which means higher interest for you) while others choose a smaller margin (lower interest for you).
It is important to remember that HELOC rates are variable. Even if you open your HELOC at a certain interest rate, the actual interest owed will vary over time. If prices go up, you owe more interest on your HELOC.
What is a good HELOC rate
It depends on the amount of equity in your home, your creditworthiness, and the real estate market you are in. But in general, the most attractive interest rate you can get is on the low end of what lenders are currently offering. Today that’s around 3.5%.
HELOC vs. Home Loan Rates
Home equity interest rates also fluctuate with the policy rate, but home equity loans have fixed rates. This means that the rate you set when you receive your home loan is the rate you pay for the entire life of the loan.
The interest rates on home equity loans are generally slightly higher than those on HELOCs. Right now the low end of what most lenders offer is around 3.75% -4.00%
6 ways to get the best HELOC award
1. Look outside the box for lenders
A good place to start your search is a bank that you already have a good relationship with. But don’t stop there. Compare rates at local credit unions (which often offer some of the best rates), online lenders, and other national banks.
Many tariffs are location-based and you may need to fill in some personal information about your home and circumstances before you can get a quote. Also, any estimate you receive may change after a formal credit check and other processes that determine your creditworthiness.
Pro tip
Local credit unions often offer competitive prices for HELOCs.
2. How much equity do you have?
The more equity you have, the better. The amount of equity you have in your home will help determine what rate of interest you can get on a HELOC and what your credit line will be.
The pandemic has resulted in even stricter requirements. “Borrowers will need more equity than they would have needed before the pandemic. And the reason for this is to reduce risk from a lender perspective, ”said Greg McBride, chief financial analyst at Bankrate. “If the borrower retains a larger share of the equity, this cushions any losses that threaten the lender in the event of default.”
The more equity you have in your home, the lower your combined loan-to-value ratio (LTV). The mortgage lending ratio is used to measure the relationship between a loan amount and the market value of your home – the lower the better.
3. Look at your credit
There are several factors that determine which HELOC plan you qualify for. One of the biggest, aside from your equity, is your credit history and history. Lenders want to see your positive payment history for past loans and debts.
Check your credit history and sign up to make sure all of your information is correct and there are no mistakes. If your credit isn’t pristine, think about ways to build your credit before you apply.
4. Think of a shorter time frame
Most HELOCs operate on a standard 30-year model with a 10-year draw period during which you can use your HELOC up to your line, and then a 20-year repayment period during which you pay back everything you spent (plus interest). ).
However, if your lender allows, a shorter draw or repayment period can result in a lower interest rate. But remember, this will give you less time to use the HELOC and / or pay off your debts.
5. Look for discounts
Many lenders offer a discounted introductory price for a HELOC, but keep in mind that a HELOC is a long-term commitment (usually 30 years). A six month discount on your tariff will not have as much impact if you use your HELOC throughout the draw period. So make sure you know what tariff you will get after the introductory period and whether you can afford it.
6. Get HELOC. at a fixed price
HELOCs are traditionally variable rate products, but it is possible to lock a fixed rate HELOC on any remaining balance. In a rising interest rate scenario, a fixed rate HELOC can save you from paying more when interest rates rise.
There is often a fee to fix this interest rate so make sure you take this into account before signing the dotted line. But when prices really skyrocket, a fixed rate lock can save money in the long run.
Bottom line
There are a few ways that you can increase your chances of getting a good HELOC rate, but the most important things will be the amount of equity in your home and your credit history.
And remember, most HELOCs have variable prices so any price you get may fluctuate based on the market.
