Need cash? A home equity line of credit, or HELOC, offers a convenient and flexible way of tapping into the value of your home.
It works in a way that’s similar to a credit card: You can borrow what you need from the credit line as the need arises, over a period of time.
But the interest is often much lower than you’d find on credit cards, so many homeowners turn to HELOCs to pay down other debt or make home improvements.
Here are some tips for getting the very best rate on a home equity line.
1. Have good credit
One of the most important things a lender looks at in determining your interest rate is your credit score.
Check your credit reports from the three major credit bureaus (Equifax, Experian and TransUnion) before you apply for your HELOC to make sure there are no errors or old “zombie” debts on your credit record that may be depressing your score.
Get a free credit report and score today from myBankrate.
Be careful not to close a credit card or take on new debt before seeking a home equity line, because those are moves that could lower your credit score and result in a higher interest rate.
2. Have enough equity
The amount of equity you have in your home obviously determines the size of your home equity line, and it also influences the interest rate you’re able to get.
The more equity you have, the less likely that you’re overloaded with debt against your home, and the better you look to the lender.
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.
A HELOC lender generally won’t want the home equity line and your existing mortgage debt to exceed 80 percent of your home’s value.
Those financial institutions want to keep your business and might offer you a good deal on your HELOC.
Compare any rate you get from a lender you know to those offered by other players including:
- Large, national banks.
- Smaller community banks and credit unions.
- Online lenders.
Online lenders have lower operating costs, which can mean lower rates. But local banks and credit unions may have a better understanding of your market and offer other advantages.
“For the people who want face-to-face contact, there’s really no substitute for a local branch where you can sit down with the lender and go through various options,” says Rick Sharga, executive vice president of Ten-X, an online real estate marketplace.
4. Ask about rate changes and caps
When you think you’ve found an awesome rate on a HELOC, find out how long it will last and how it might change.
A home equity line of credit typically comes with an adjustable rate that fluctuates in sync with the prime. However, some lenders may fix your rate for an initial period.
Ask each lender about your starting rate, how long it will hold and whether there’s a cap on how high your rate might eventually go. If there is no cap, you run the risk of your interest rate pushing your monthly payment beyond what you can afford.
Note also that during the first stage of a HELOC, you can draw from your credit line and pay only the interest as your minimum monthly payment. At the end of that draw period — which can last five years or more — you must pay both interest and principal.
“That’s something you need to understand, that your payments could double in a few years,” Sharga says.
5. Beware of fees
Don’t be so dazzled by a low HELOC rate that you miss fees that could be hiding behind it.
Some lenders will charge upfront fees, third-party fees, an annual fee — or require you to draw a minimum amount of credit to avoid a fee.
Make sure you understand the fees you might be paying in addition to your interest rate. The additional costs can add up.