Financial Literacy - Smart borrowing
home equity
How to get the best loan rates

2. The skinny on home equity

What impacts rates: Home equity loans are pegged to long-term interest rates like the 10-year Treasury notes, while home equity lines of credit, or HELOCs, have variable interest rates pegged to the prime rate. The prime rate moves in lock step with Fed interest rate changes.

With home equity loans, borrowers get money upfront in a lump sum at a fixed interest rate and make the same payment each month for the loan term.

HELOCs are lines of credit that allow the borrower to draw money periodically when needed. The interest rate can vary, depending on the prime rate, and the borrower may have the option to make interest-only payments over specific periods of time.

Interest rates for HELOCs are favorable now because Fed actions over the past year have driven down the prime rate.

However, lenders looking to avoid exposure from falling home prices and foreclosures have taken to freezing or reducing HELOCs in some areas and making home equity loans harder to get.

Highs and lows: Home equity loan rates over the past five years ranged from 6.62 percent to 8.19 percent for $30,000 loans. Over the past year, the rate has averaged about 8 percent.

HELOC rates over the past five years have ranged from a low of 4 percent in August 2003 to a high of 8.25 percent in September 2007. Over the past year, they have averaged in the neighborhood of 6.8 percent.

Bankrate's Interest Rate Roundup gives you the latest information on home equity loan and HELOC rates.

How to get the best rate: Know your credit profile and take action while interest rates are low.

Consumers with FICO scores of 720 or higher, low debt-to-income and low loan-to-value ratios, and high cash reserves are getting the best rates on HELOCs right now, according to Ritch Workman, president of the Florida Association of Mortgage Brokers.

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To get the best rate, it pays to comparison shop. Compare home equity loan rates and HELOC rates offered in your area on Bankrate.com.

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Time to sound HELOC alarm bells?

Dear Dr. Don, I have a variable-rate home equity line of credit, or HELOC, at 2.9 percent. I'd like to convert it to a fixed-rate mortgage. I have 20 years remaining to pay off the home equity line. Would it be beneficial... Read more

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