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We usually associate house-based lending — mortgages, home equity loans — with a fixed interest rate and stable payments. But home equity lines of credit (HELOCs) are different: The interest rates on HELOCs are usually variable, fluctuating with the prime interest rate (or other benchmark rate) — plus an additional percentage, or margin, your lender puts on.
Several factors come into play when it comes to securing a favorable initial rate on a HELOC. Your credit score is one of the most significant elements, along with your debt obligations and your overall financial health.
So, shopping around for a HELOC is crucial — for the most competitive interest rate, obviously, but for other favorable terms and conditions, too. Prepayment penalties, the length of the draw period, minimum draw amounts, interest-only payments, annual fees, “lock-in rate” fees: These factors can significantly impact your overall costs throughout the life of the loan.
In this post, we cover 10 essential tips for getting the best HELOC rate — plus the outlook for HELOC rates in 2024.
A HELOC is a way to tap into your home’s equity — the portion of your home you own outright. Like a credit card, a HELOC lets you borrow from a credit line gradually, as the need arises, up to a specified credit limit and pay the money back in installments. Unlike a credit card, however, HELOCs are broken up into two distinct periods– a draw period and a repayment period. During the draw period, you can borrow funds and pay only interest. During the repayment period, you can no longer withdraw money and must repay both principal and interest.
10 tips to get the best HELOC rate
1. Maintain good credit
Having a good credit score is one of the key ways to obtain a competitive interest rate when applying for HELOC. A lender will consider your FICO credit score to determine the interest rate.
A credit score of 700 or above will most likely qualify you for the best interest rates, though homeowners with scores as low as 620 might still get approved.
“It’s all part of the riskiness factor for the lender, if they’re gonna lend to you or not,” says Sacha Rady, Realtor and real estate advisor at Engel & Völkers Atlanta, a real estate service provider based in Georgia. “They want to make sure they get paid back. The lower the credit score, the higher the interest rate you’re going to have.” Your credit score will also determine which loan products you might qualify for.
There are steps you can take to help improve your credit score when applying for a HELOC. Some of the quickest actions you can take include checking your credit report and disputing any errors, keeping your credit card balances low and making all credit payments on time.
It is also important to be very careful about opening new lines of credit. Your credit score declines slightly every time you open another account.
Takeaway: Having a higher credit score will help you get lower rates, so do what you can to raise it before you apply.
2. Have enough equity
The amount of equity (outright ownership stake) you have in your home determines the size of your home equity line of credit, 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.
“The lower your loan-to-value, the less risk to the lender, so your pricing is probably going to be slightly better,” says Heather Kyle, a loan officer at Guild Mortgage, a California-based 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. Here’s an example:
$325,000 (home value) – $215,000 = $110,000 (amount of equity in dollars)
$110,000 / $325,000 (home value) = 0.338 (33.8 percent equity)
Takewaway: 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 local market and offer you more personalized service — especially if you already do business at that institution. To get the best HELOC rate, try to get at least three quotes when considering your options.
“When you’re comparing lenders, compare all of the factors, not just the rate,” says Kyle. “Even with a lender that might have a slightly higher rate, [they] might have lower fees, there might be better repayment terms, or you might qualify differently.”
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 or other benchmark index. However, some lenders may offer you a fixed 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 Vikram Gupta, executive vice president and head of home equity for PNC Bank.
Find out how long your introductory rate will last and what your rate will be after that period ends — especially if you’re planning to withdraw funds over several years. 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.
“As human beings, we think, ‘Oh well, my payment may go up in the future, but I’ll be making more money by that,’” says Kyle. “We think these things and that might not be the case. You need to pay attention to that rate cap so that you know the maximum amount you could be paying.”
Takeaway: A low rate cap protects you against a market of rising interest rates.
6. Factor in fees
While obtaining a low interest rate is important, the fees associated with a HELOC also play a big factor in your final cost. “All lenders have different fees associated with a HELOC, and they could be vastly different,” says Kyle. “When [you] talk to a loan officer, [you] should get that out there up front to compare apples to apples.”
Some lenders charge upfront fees, third-party fees or an annual fee. They may also require you to draw a minimum amount of credit to avoid a fee or charge inactivity fees, which can negate any benefit you may receive from a low HELOC rate. Some lenders may charge a fee to lock in a fixed interest rate, but you could pay less out-of-pocket over the life of the loan with a fixed rate HELOC, rather than a variable-rate variety (see tip number nine, below).
Get documentation for each quote you receive, including the associated interest and all rate fees so you can compare your options side by side. It’s important to evaluate the total, long-term cost of each loan offer. And don’t be afraid to negotiate. “With home equity lines of credit, there are fees and costs involved, but a lot of lenders offer to pay those for you,” says Raymond Portales, an independent mortgage broker.
Takeaway: When comparing lenders be sure to consider any relevant fees, as well as the interest rate, in order to get a true picture of the total cost of the loan. And when evaluating costs, remember, some loans – even with fees – may still end up having a lower overall cost.
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 you are unable to make the balloon payment for some reason, you may be forced to refinance the loan or even sell your property entirely in order to cover the payment.
Assuming you can handle it is “an optimistic viewpoint that is great to have, but at the same time, it can cause you to make unwise decisions,” says Kyle. “Make sure you have reserves in case anything goes wrong. You want to be in a position where a little hiccup is not going to put your home in jeopardy.”
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 the 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, so 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.
“Fixing the rate protects the consumer from rate increases and payment increases,” says Mark Worthington, manager with online lender Churchill Mortgage.
If you feel interest rates are going to rise before you have the ability to pay off the HELOC, then obtaining a fixed rate can provide some comfort and security, says Worthington.
However, a longer period with a fixed interest rate could mean a higher interest rate. And the strategy could backfire, if interest rates start dramatically declining.
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.
“Some lenders offer what I call bundled pricing,” says Jean Chalifoux Kiely, director of consumer banking at Sunrise Banks, based in St. Paul, Minn. “The deeper the relationship, the deeper the discount.”
You might see greater benefits if you are a net-worth client—we’re talking a million dollars or more. For these fortunate souls, lenders “offer some discounts, sometimes a quarter, half, or even a full percentage point off the rate,” says Portales.
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.
HELOC borrowing rates may have peaked, but they could remain high for longer, depending on the future paths of the economy and inflation. — MARK HAMRICK, BANKRATE SENIOR ECONOMIC ANALYST
What are HELOC rates expected to do in 2024?
Like other interest rates, HELOC rates climbed steadily in 2023, spiking to double digits at the end of the year. But they began to back down in early 2024, hovering around 9 percent. HELOC rates are expected to decline for the rest of the year, potentially reaching an average of 8.45 percent by year-end compared to 10.12 percent in December 2023, according to Bankrate’s chief economist, Greg McBride.
The primary driver for this anticipated decrease in HELOC rates is the Federal Reserve’s easing its war on inflation. “An expected decline in HELOC rates will be spurred primarily by Fed rate cuts,” says McBride, “but we’ll see more introductory rate offers on HELOCs, so the average HELOC rate will be down more substantially than two Fed rate cuts would indicate.”
However, the timeline and extent of HELOC rate declines will depend on various factors, including economic data and the Fed’s actual actions. “Based on the guidance of Federal Reserve policymakers, the future direction of benchmark interest rates is likely lower,” observes Mark Hamrick, Bankrate’s senior economic analyst. “Rate reductions could come at a measured pace. In terms of the trajectory, that means higher for longer could be the vibe for at least the next year or so, unless the economy slows dramatically.
“The way that rates fall might be more like a feather than a hammer,” he says. “As for where they level out, that’s anyone’s guess. But the remarkably low rates that existed until pandemic-era outsized inflation won’t likely return in the intermediate term.”
As a result, it is essential to stay informed about market trends, economic indicators, and potential changes to the Federal Reserve’s monetary policy decisions. Borrowers should be prepared for fluctuations and shop around for competitive rates.
Bottom line on getting the best HELOC rate
A HELOC can be a useful way to cover large or unexpected expenses. Even with the continued rate hikes, in many cases, HELOCs will still be a better bet than credit cards, personal loans and even home equity loans (though the interest-rate gap between the two has closed in the last year). But in the current economic environment, it’s more important than ever to do your due diligence before choosing a lender.
As you investigate, remember that there are steps you can take to reduce the amount of interest you pay over the life of the loan including considering different types of lenders, opting for shorter draw periods, locking in rate caps and taking advantage of discounts.
It’s also a good idea to work on improving your credit score in order to qualify for the best offers, ideally several months before you apply. That’s a strategy for all seasons, no matter what the current interest-rate climate is like.
FAQ
Should you shop around for a HELOC loan?
Absolutely! Shopping around is crucial for securing the best HELOC rate and terms. Different lenders offer varying rates, fees, and draw periods. Comparing offers can save you thousands in interest over the loan term. You want to get quotes from at least three to five candidates, including banks, credit unions and online lenders. Compare loan APRs, not just interest rates. The APR reflects all loan costs, including interest, fees, and points.
What is the monthly payment on a $50,000 HELOC?
For example, on a $50,000 HELOC, your monthly payment would be around $559, assuming a 9.17 percent variable APR, a 10-year draw period, and 20 20-year repayment period. This estimate also considers a lender fee of $35 per year and additional withdrawals of $100 per month. You can crunch numbers with Bankrate’s HELOC payoff calculator to see how much your HELOC loan could cost monthly.
It depends on several factors, including:
Interest rate: A lower rate translates to lower monthly payments.
Draw period: The longer the draw period, the smaller your payments will be (but you’ll accrue interest for longer).
Repayment period: Choosing a longer repayment term lowers monthly payments but increases overall interest costs.
What is a good rate on a HELOC right now?
As of early July 2024, the average HELOC rate is around 9.17 percent, within a range of 8.64 percent to 10.81 percent. A “good” rate should be below the national average. Rates can vary depending on several factors, including your credit score, loan-to-value ratio (LTV), and chosen lender.
Is it hard to get a HELOC right now?
The denial rate on HELOC applications in the first quarter of 2024 was 51 percent. In other words, close to half of HELOC applicants are turned down, according to the Home Mortgage Disclosure Act. The difficulty of getting a HELOC currently depends on your financial situation and lender requirements. While stricter lending standards exist compared to pre-pandemic times, it’s possible to qualify.
Factors affecting HELOC approval:
Credit score: Strong credit scores (740+) increase your approval chances.
Debt-to-income ratio (DTI): Lower DTIs (ideally below 40 percent) are more favorable.
Employment and income stability: Steady income and employment history are preferred.
Home equity: Lenders typically require you to own at least 20 percent of your home outright, and will let you borrow up to 80 percent of your equity. But some lenders let you access more: up to 90 percent of your ownership stake, depending on your financial profile and the home’s worth.
