Interested in using a home equity line of credit, or HELOC, to get enough money for something? A HELOC is a way to tap into your home’s equity and use it to pay for unforeseen or large expenses.
A HELOC works similarly to a credit card — you can borrow from a HELOC’s credit line as the need arises, and then pay it off in installments. However, interest rates are typically much lower than you’d find on credit cards.
Read on to learn more about HELOC rates and how you can get the best one for your circumstances.
Here are 10 simple ways to get the best HELOC rates:
- Maintain good credit.
- Have enough equity.
- Consider different types of lenders.
- Understand introductory rates.
- Look for rate caps.
- Factor in fees.
- Watch out for balloon payments.
- Choose shorter draw and repayment periods.
- Look for fixed-rate options.
- Take advantage of discounts.
What is a HELOC?
Similar to a credit card, a HELOC allows you to draw up to a specified credit limit, but you’ll only have to pay back what you borrow. HELOCs are broken up into a draw period, during which you can borrow funds and pay only interest, and a repayment period, when you can no longer borrow any more money and must repay both principal and interest.
How HELOC rates work
While home equity loans have fixed interest rates, HELOC interest rates are typically variable. HELOC interest rates track the prime rate, which has remained relatively low, so you can still find a low HELOC rate — even if that rate fluctuates over the term of your HELOC.
However, your rate won’t necessarily be the prime rate. Your personal rate equals the prime rate plus a margin. The margin is largely determined by your credit score, the amount of equity in your home and your debt-to-income ratio. A higher credit score equals a lower margin and therefore a lower monthly rate.
What is a good HELOC interest rate?
A “good” HELOC interest rate largely depends on your financial situation. For someone with good credit, the best interest rates start around 2.25 percent. If your credit score is lower, rates can be as high as 18 percent. No matter what your credit score, you can talk to different lenders to find out which will give you the best HELOC rate.
Try to find an interest rate that is below the average HELOC rate, which is 3.88 percent as of September 15, 2021. Shop around with multiple HELOC lenders to see the average rate for your credit history.
HELOC vs. home equity loan
One of the most notable differences between a home equity loan and a HELOC is the way proceeds from the loans are released. With a home equity loan, you receive a lump sum of money immediately. When establishing a HELOC, however, you’re able to withdraw funds as you need them, up to a specified credit limit.
When the line of credit’s draw period expires, typically after five to 10 years, you enter a repayment period that usually lasts up to 10 or 20 years. During the HELOC’s repayment period, you pay principal and interest on the amount you borrowed.
Both types of loans require you to start making payments immediately, however. When you set up a HELOC, you must make interest payments during the draw period on any money borrowed. With a home equity loan, you begin making principal and interest repayments shortly after closing on the loan.
The other major difference between a HELOC and a home equity loan is the interest rate you’ll pay on any money borrowed.
“The HELOC’s rate is variable and based on the balance outstanding, and so the customer typically has variable payments every month, which are subject to fluctuating rates,” says Vikram Gupta, head of home equity at PNC Bank. “A home equity loan, on the other hand, is a closed-ended loan where you borrow the entire balance on day one and have a fixed principal and interest schedule over the life of the loan at a fixed interest rate.”
10 ways to get the best HELOC rate
Searching for a HELOC can be a daunting task. It’s important to shop around with different companies, as your estimate may differ depending on the provider. The lender that holds your current mortgage or the bank where you keep your checking or savings accounts are good places to start since those financial institutions want to keep your business and might offer you a good deal on a HELOC (if they offer HELOCs).
As you look for the best HELOC lenders, keep these tips in mind for getting the best rates.
1. Maintain good credit
When applying for a HELOC, you’ll need to go through an approval process that’s similar to applying for a mortgage.
As with a mortgage application, a lender considers your FICO credit score to determine your interest rate. Before you apply for a HELOC, check your credit reports from the three major credit bureaus (Equifax, Experian and TransUnion) to confirm that there are no errors or old “zombie” debts on your record. These negative items can lower your credit score.
Don’t close a credit card or take on new debt before seeking a HELOC, as those moves could lower your credit score even further.
Takeaway: Your credit score is one of the main determiners of your HELOC interest rate.
2. Have enough equity
The amount of equity you have in your home determines the size of your home equity line, and it influences the HELOC rate you’re able to get. The more equity you have, the better you look to a lender and the less likely that you’re overloaded with debt against your home.
Having a decent amount of equity also means that you’ll have a lower combined loan-to-value ratio, or CLTV. The CLTV is determined by adding up your current loan balance and your desired line of credit and then dividing by the appraised value of your home. For HELOCs, lenders typically prefer CLTVs below 85 percent.
“Typically, borrowers who have accumulated more equity in their property are considered to be a lower risk and may be offered a lower interest rate,” says Michelle McLellan, senior product management executive for Bank of America.
To get an idea of how much home equity you have, find an online estimate for the value of your home and subtract the balance owed on your mortgage. Here’s an example:
- $250,000 (home value) – $170,000 = $80,000 (amount of equity in dollars)
- $80,000 / $250,000 (home value) = 0.32 (32 percent equity)
Takeaway: You’ll likely find lower HELOC rates if you have substantial equity built up in your home.
3. Consider different types of lenders
While your current lender may offer you a good deal on a HELOC, don’t stop there. Compare estimates from other players, including national banks, smaller community banks, credit unions and online mortgage lenders. Each type of lender has its own advantages.
For instance, online lenders generally have lower operating costs, which can allow them to offer you lower interest rates, while local banks and credit unions may have a better understanding of your market and offer you more personalized service. To get the best HELOC rate, try to get at least three quotes when considering your options.
Takeaway: Your local bank or credit union is a great place to start looking for a HELOC, but it’s always best to compare rates from at least a few lenders to make sure you’re getting the most competitive terms.
4. Understand introductory rates
When you think you’ve found a great HELOC rate, find out how long it will last and how it might change over time. A HELOC typically comes with an adjustable rate during the initial draw period that fluctuates in sync with the prime rate. However, some lenders may offer you a competitive introductory rate, sometimes called a teaser rate.
“Some lenders offer very attractive introductory rates for the first six to 12 months only to increase it meaningfully after that period,” says Gupta, of PNC Bank.
Find out how long your introductory rate will last and what your rate will be after that period ends. A lower rate during a yearlong introductory period may not be worth it if your rate skyrockets after.
Takeaway: Know how and when your HELOC interest rate might change during the draw and repayment periods.
5. Look for rate caps
Some HELOCs offer rate caps as a safeguard against rising interest rates. If you select a HELOC with a low rate cap, you’re protected from paying more than that maximum, even if the prime rate spikes. If there is no cap, you run the risk of your interest rate pushing your monthly payment beyond what you can afford.
Takeaway: A low rate cap protects you against a market of rising interest rates.
6. Factor in fees
Don’t be so enticed by the lowest HELOC rates that you miss hidden fees. Some lenders will charge up-front fees, third-party fees or an annual fee or require you to draw a minimum amount of credit to avoid a fee. Some even charge inactivity fees, which can negate any benefit you may receive from a low HELOC rate.
Get documentation for each quote you receive and keep track of all fees so you know the total cost of the HELOC over time.
Takeaway: Not all HELOC lenders wrap fees into the rates they advertise online. Add in any relevant fees when comparing lenders.
7. Watch out for balloon payments
Getting a low monthly rate may seem like the most important factor when choosing a HELOC, but sometimes those low rates come at the expense of a balloon payment. A HELOC with a balloon payment requires you to pay off your remaining balance in a lump sum at the end of your term — a potentially huge payment if you’re not prepared for it.
“If your loan has a balloon payment and if you have questions or concerns, you should reach out to your lender at least a year in advance to find out what options may be available to you,” McLellan says.
Takeaway: A low rate may not be worth it if the trade-off is a huge balloon payment at the end of your term.
8. Choose shorter draw and repayment periods
Many lenders have only one set of HELOC terms, but some lenders may let you choose the length of your draw period and repayment period. Opting for a shorter repayment term can decrease the amount of interest you pay.
In addition, you may score a better interest rate if you select a shorter repayment timeline. Check with different lenders to see if changing the length of the draw or repayment periods is a possibility.
Takeaway: Shorter draw periods and repayment periods pose less risk to the lender; because of this, you may be offered lower interest rates if you have the option to choose shorter terms.
9. Look for fixed-rate options
More and more lenders are offering the option to convert some or all of your HELOC balance into a fixed-rate loan for a set period of time, sometimes without a fee. This is a good option if you want to lock in the interest rate without worrying about potential fluctuations in the market. However, a longer period with a fixed interest rate could mean a higher interest rate.
“Payments are predictable and stable, and this option can protect you from rising interest rates,” McLellan says.
Takeaway: If interest rates are low, fixed-rate options during the draw period could be a selling point. Even if the lock comes with a fee, it may be worth it to avoid future rising rates.
10. Take advantage of discounts
If you have an existing relationship with a bank or credit union, you may qualify for member discounts on your HELOC rate. Many lenders also offer rate discounts for setting up automatic payments.
You should still talk to multiple lenders, though, as the best deal isn’t always with a bank you already have a relationship with.
Takeaway: Autopay or member discounts are possible ways to lower the APR on your HELOC, so look for ways to save wherever you can.